How I’d invest being 5, 10, 15 years out from retirement
A student inside my 10x Investing program asked this question:
“I am 62 and plan on retiring in 5 years, so my question is will the 90/10 option using VOO and VGSH (Warren’s Widow) be too much risk for me at this stage or is 5 years enough time for it?”
Specifics of the strategy aside, this is a fairly common question so I want to answer it with how I would invest for retirement if I were 5, 10, 15 years out.
It is important to note that I am currently 40 with a family of 5, have a fairly high risk tolerance, and don’t know what life will be like for me as a 60 year old. But below is how I intend to handle retirement investing a few years down the road.
REQUIRED DISCLAIMER:
Bob Lotich is a financial educator, not a financial/investment advisor. He is sharing his personal experience and opinions; therefore, all strategies, tips, suggestions, and recommendations shared are solely for entertainment purposes and shouldn’t be construed as specific financial advice. There are financial risks associated with investing, and Bob Lotich”s results are not typical. For one-on-one investment advice specific to your situation we recommend hiring a financial/investment advisor and conducting your own due diligence.
The S&P best and worst returns
Source: The Balance
Before we get to answering this question, we need to take a look at this chart.
It shows the best and worst returns over 1, 3, 5, 10, 15, 20 year periods. The reason this is so important is because this gives us a hint as to what our worst-case scenario might be.
So over a 1 year period, I should be comfortable with a 40% drop in my investment (not too far from what happened in 2020).
But over a 15 year period, it is comforting knowing that there hasn’t been any 15 year periods where you would have lost money in the S&P.
So if I have $100k and want to retire next year, am I going to throw it all in an S&P 500 Index fund?
Heck no!
Because I don’t want to risk being down 40% when I go into retirement. Once I am that close to retirement, my goal is to transition to preservation mode with my investments rather than growth.
If I were 5 years out from retirement
Answering the original question: for me, it’s more risk than I would want to take with only 5 years to retirement.
The S&P 500 dropped by about 34% in March of 2020 and while it happened to bounce back quickly, in some recessions in the past it has taken 5 years (or more) to recover.
So personally, at that point, I wouldn’t want 90% invested in the S&P 500. I’d rather trade some of the growth potential for a little less risk by using one of the other strategies I suggest in 10x Investing.
If I were 10 years out from retirement
The likelihood of losing money in the S&P 500 over a 10 year period historically has been pretty low, but it has still happened occasionally. So at this point I would have a percentage of my portfolio in the S&P 500, but probably a bit less than 90%.
Personally, if I were feeling more risk averse at this point I would probably lean towards what I call the All-Seasons portfolio.
Or I might just use the Wealthfront strategy I teach in 10x Investing with a moderate risk tolerance to make it really simple.
If I were 15 years out from retirement
Looking back at the chart above, you can see that there hasn’t been any 15-year period where you would have lost money.
In fact, in the worst 15 year period you would have made about 3-4%.
Knowing this, personally, I would still be growth mindset and will probably be using the Warren’s Widow strategy I teach in 10x Investing to maximize the growth potential.
And once a few years passed and I got closer to my retirement date I would make adjustments as needed.
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