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Currently, I am 40 years old and I am investing in Traditional IRA (T Row Price actively managed funds) and also Index Funds (Vanguard). At what age, I should move to money conservation phase?

Currently my investments in Traditional IRA is in NON index funds. Should I start moving money into more stable less risky mutual funds when I am nearing retirement like bonds or index funds etc.

I am in USA.

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There are many variables that cannot all be considered in this type of forum. How much in total do you have saved now? How much are saving now? What standard of living do you expect to have in retirement? Do you have other goals you want to accomplish (children's college, invest in rental property, etc.)?

There are very broad rules like the "rule of 120" where you should invest 120 minus your age in stocks and the rest in bonds, but that is just a very broad starting point (usually to make sure you aren't being too risky). There's nothing magic about it, just a rough gauge to make sure that you reduce your risky investments as you age.

There are also several "retirement calculators" online that take more variables, but again it is more of a reality check (are you saving enough to retire when you want) than a specific plan.

If you have a lot saved already, or have more complicated goals, I would call a local financial advisor that is willing to walk through all of these factors and come up with a plan that meets your needs. If you feel like you're being "sold a product" like a specific annuity, commodity (gold), or life insurance program, I would be very hesitant. Many advisors are more focused on sales than service. Find one that makes sure you understand what you're investing in and don't feel pressured into using them.

As a side note, index funds are not generally "less risky" - they are just cheaper (lower fees) because they don't have a manager that is actively deciding what stocks/bonds to put in. There are active and passive (index) funds all over the risk/return spectrum.

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  • Let me ask this. If you had 1 million saved in retirement at 59 1/2 and your portfolio is in index funds and moderately aggressive actively managed funds then what would you do? Would you keep it there or move it around.
    – Mary Doe
    May 12, 2022 at 15:04
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    @Mary Doe - I have a neighbor (age 55) whose net worth was in highly concentrated aggressive positions with a money manager. He had stellar gains in the past two years and thought that it wouldn't end. 6 months ago, I suggested that he consider either dialing back some of the risk or preferably, laying off some of the risk with some hedging. Well, the market turned, and he gave up 30% of his net worth in a few months. He's devastated. Risk and reward go hand in hand. You have to decide how much risk you can tolerate in order to attain more reward. May 12, 2022 at 15:55
  • @MaryDoe What I would do is largely irrelevant - that's why I didn't give specific advice. There are too many variables to give specific advice. If you think your portfolio is too risk, then there's nothing wrong with dialing it back (realizing that you may be giving up gains in a bull market). Neither is bad, and you can't know ahead of time what would give you the best return (or least losses)
    – D Stanley
    May 12, 2022 at 16:18
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    @MaryDoe - to your question about if Ihad a million - Yes, I would leave it right where you described them. But that’s me - I am fine with the roller coaster ride that will result, and I can sleep well if the market is 50% done. The question is: can you?
    – Aganju
    May 15, 2022 at 2:29
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If you retire at 65 and plan to use the retirement savings until you're 85 years old, then the average age at which you withdraw your money is 75.

You're 40 now so if you save something, you keep it in investments for 35 years.

Today non-US stocks have sustainable P/E rating of about 15, so with 2% inflation that's about 100%/15 + 2% = 8.7% inherent yield (minus costs, which you can avoid by a buy-and-hold strategy, rarely changing your investments, and alternatively minimize by using low-cost index funds).

Now the question is, what would need to happen for non-US stocks to yield less than US government bonds? The 10-year treasury rate is 2.91% today so if we assume the high inflation is short-lived and returns back to 2% inflation, in 35 years government bonds multiply your wealth by 1.0291^35 = 2.7291x.

Non-US stocks would multiply your wealth by 1.087^35 = 18.537x.

So if at the worst possible moment (35 years from now) the valuation of stocks drops sharply due to a stock market crash, how severe would the crash need to be?

Pretty severe. 2.7291/18.537 = about 0.15. Not even during the Great Depression did we see such a 85% crash.

One word of warning. I said "non-US stocks". The reason I prefer non-US stocks is that US stocks have a seemingly acceptable P/E of 20, but that's due to record-high earnings. US tech companies like Meta, Apple, Amazon, Microsoft and Alphabet have been vacuuming lot of money from foreign countries and even corporate profits made in US relative to GDP are at unnaturally high levels. None of this will continue forever, however. There are already plans to reduce the power of major tech companies. A better view of US stock valuations is the CAPE ratio also called Shiller's P/E which is today 31. And even that doesn't today reflect the massiveness of the US stock bubble, because CAPE ratio is calculated from 10-year average earnings and for at least most of the past 5-7 years, they have been pretty high. So the "sustainable P/E" is probably around 40 in US stock market.

So US stocks can be expected to yield 100%/40 + 2% = 4.5%.

In 35 years, that's 1.045^35 = 4.6673x. If after 35 years the valuation normalizes, that would about halve what you have so 0.5*1.045^35 = 2.3337x.

So unless the major US stock bubble vanishes soon so that you can reinvest dividends at attractive valuations, today US stocks may yield less than government bonds for the next 35 years.


My advice: for at least the next 15 years, invest 100% of your money into stocks, preferring non-US stocks and maybe picking some individual US stocks avoiding those that have excessive valuations. Anything in Nasdaq, don't buy. Something in Dow Jones, maybe, if the sustainable valuation is right.

Then after 15 years have elapsed, reconsider your plans. It may be a good idea to start increasing bond amounts and decreasing stock amounts, if bond yields have normalized and non-US stock yields are about the same.

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Should I start moving money into more stable less risky mutual funds when I am nearing retirement like bonds or index funds etc.

That is the general idea. As long as you realize that those terms (stable, nearing retirement, less risky) depend on your situation.

The gradual move to less risky investments is the thing that drives the Target date funds, and the default investments in 529 plans. You will over the next few decades tweak the investments you have as your situation changes. People have to do this when they get married, they have kids, those kids go to college, they move out, and the parents have an empty nest. Periodic reviews are a good thing.

But overall that is the basic idea. The nature of the investments you have when you are 20 will be different than the ones you will have at age 80.

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