A Retirement Expert On What Not To Do In An Election Year, The 4% Rule, and More

With the U.S. presidential election now just a week away, many investors are worried about how the outcome could affect their financial health.

Christine Benz, director of personal finance and retirement planning for Morningstar, urges people to avoid making drastic changes to their retirement investing strategies in an election year. 

In a conversation with Investopedia, Benz also spoke about not following retirement rules of thumb blindly. These rules, like the 4% rule and the 60/40 portfolio, are considered a part of conventional retirement investing wisdom and may be good starting points, but they’re not for everyone. Both of those rules have come under fire recently for different reasons, though the 60/40 portfolio has made a comeback after suffering losses in 2022.

Here’s an excerpt of the conversation, edited for brevity and clarity:

INVESTOPEDIA: With uncertainty about the election and whether the economy will enter a recession, should people change the way that they’re investing for retirement? If so, how?

Probably not. I would tend to use a strategic approach to asset allocation where I’m starting out pretty heavy on equities—because I can afford to take the risk—and then I’m only gradually adding fixed income as retirement draws close. 

I’m [also] not reacting too much to what’s going on in the market, except to do some rebalancing if the positioning of my asset class exposures has changed. I would definitely urge people to be hands-off with respect to changing up their portfolio ingredients based on their expectation of what might happen in the election or the economy or anything else.

INVESTOPEDIA: Conventional wisdom says ‘be aggressive with equities when you’re younger and lean into fixed income as you grow older.’ What are your thoughts on the 60/40 portfolio? Do you think it’s still an important benchmark?

It’s probably too conservative for people who are a few decades from retirement. 

Younger investors should have more aggressively positioned portfolios, because, again, they can afford to bear the volatility that comes with the long term portfolio if they don’t need the funds anytime soon

[For] people who are closer to retirement, I like the idea of crafting an asset allocation mix based on your situation… Carve out maybe two years’ worth of portfolio withdrawals in cash investments and then another five to eight years in high quality fixed-income. When you do the math, it basically translates into a 60/40 portfolio.

INVESTOPEDIA: Is that allocation of cash and fixed income based on how long it would take to ride out a market downturn?

Exactly. When we look at stock performance over rolling 10-year periods [in market history], roughly 90% of the time, stocks would be in the black. When you shrink that horizon to five years or three years, stocks aren’t particularly reliable. 

So if you have a two-year horizon, the only asset that is reliably in the black over such a short horizon would be cash. You have a little bit of inflation risk there, but your holding period is short, so it’s not a huge deal.

And then you kind of just step out on the risk spectrum from there, so a high-quality, short- and intermediate-term bond portfolio would be very reliable over a time horizon anywhere from from five to 10 years.

INVESTOPEDIA: In your recent book How to Retire: 20 Lessons For a Happy, Successful, and Wealthy Retirement, you talk about the 4% rule. What role does it play in planning now?

I think it’s a fine starting point for people who are trying to determine whether they have enough to retire. The basic question [for retirees] should be ‘Does Social Security plus 4% of your investment portfolio get you close to that planned spending goal?’

Ideally, you would add more nuance. Research generally shows that people don’t spend the same amount, inflation-adjusted, in retirement. People tend to spend the most in the early years and then that spending tends to trail down throughout much of their retirement. Some people [also] have long-term care costs later in life.

I would spend less if my portfolio has had losses—the reason is that it leaves more of the portfolio in place to recover when the markets do… You should be able to spend more in good years if you’re willing to take less in bad ones.