BoomerGirl Diary

My late aunt was so worried about running out of money in retirement that she put all her investments in certificates of deposit and spared just $1 for the church envelope each Sunday.

Her retirement, and the church's budget, could have been a little more prosperous if she knew what we know now. New research shows retirees with mostly fixed-income investments have a greater chance of running out of money in retirement than those who add stocks to their retirement portfolio.

Because my aunt had irrational fears about stocks, not only did she have less for retirement, but she also had less for her heirs and lost her ability to leave a legacy through charitable giving.

The quandary faced by her, and maybe all retirees, centered around what to invest in and how much to withdraw each year without running out of money before dying.

What's the answer? Surprisingly, it's not to abandon stocks as you move into retirement, according to an analysis by William Bengen, a California certified financial planner who shared his findings in the book, "Conserving Client Portfolios During Retirement."

That's a departure from what many financial advisers have long recommended for retirees - keep most of the money in low-risk investments such as bonds to avoid losses.

But as people live longer, the focus has shifted to how to keep the money longer. The likelihood a retiree will live to 90 is now 58 percent, the Society of Actuaries says. That means it makes more sense for retirement portfolios to be planned for 25 years or more for those retiring at 65. And long-term portfolios include stocks for growth and to outpace inflation.

Bengen analyzed 50 years of stock and bond returns between 1926 and 2004 and broke them into 30-year retirement periods to see which mix of investments and how much withdrawn resulted in money lasting the longest, even during bear markets.

The answer: 63 percent in stocks and 37 percent in bonds with 4.15 percent withdrawn every year equated to no chance of a retiree running out of money in 30 years. A smaller amount of stock holdings, under 40 percent of the portfolio, and a greater share of bonds, 90 percent or more, had the best chance of running out before 30 years at that withdrawal rate.

Make 20 percent of those stock holdings small-cap stocks and the withdrawal rate is the highest, 4.42 percent, with the least chance of running out of money.

Mary Brooks, a certified financial planner in Colorado Springs, Colo., who has reviewed Bengen's work, agrees with giving retirement portfolios a stock boost.

"I'm talking to my clients about it," she said. "The old rule of thumb was your age should approximate what percent your fixed portfolio should include. I have never thought that; it's too conservative."

Brooks said for Bengen's numbers to work, retirees need to make sure their portfolio maintains the percent balance of each investment and they don't get carried away by taking out more in years with large stock gains. Bengen's analysis showed the optimal time to rebalance is every five to eight years to allow stocks to cycle through a run-up.