George Kamel: "Sometimes the Riskiest Thing You Can Do Is Stay Too Conservative in Your Investing"

A listener on The Ramsey Show, identified as Sydney from New York, sought advice from George Kamel regarding her investment strategy as she approaches retirement. At 55 years old, Sydney has accumulated approximately $1.8 million in savings, with plans to retire in four and a half years. Her portfolio consists of about $1 million in a company 401(k) and an additional $800,000 in various accounts, with her 401(k) invested aggressively and yielding an average annual return of 10-11%.

During the October 22 episode titled “Don’t Let Shame Keep You Stuck,” Sydney asked Kamel when she should transition from growth-oriented investments to safer, more conservative options. Kamel emphasized that sometimes the riskiest approach can be to remain overly conservative with investments. He pointed out that the decision to shift funds is crucial, as retirement can span 25 to 30 years, and an overly cautious strategy could lead to running out of funds before the end of retirement.

Kamel highlighted the impact of inflation on purchasing power, noting that even if account balances appear stable, inflation can erode their value over time. He referenced the Consumer Price Index, which reached 336.3 in September, the highest level in a year, and mentioned that Social Security is set to provide a 3.6% cost-of-living adjustment in 2027 to help retirees cope with rising prices. In contrast, the average return on a 12-month certificate of deposit (CD) is about 1.8%, which means that money left in such accounts loses value over time due to inflation.

To illustrate the potential consequences for Sydney, Kamel presented a scenario in which she withdraws 4% of her savings, or $72,000, in the first year and increases her withdrawals by 3% annually to keep pace with inflation. By the 25th year of retirement, she would need approximately $151,000 to maintain the same purchasing power that $72,000 provides today. If she were to retire at 60 and solely invest in CDs, her funds could be depleted by her early 80s, demonstrating the risk of an overly conservative approach.

While conservative investments have their merits, particularly with the current 10-year Treasury yield reaching 5.1%, Kamel cautioned that fixed yields do not adjust with rising inflation. If inflation exceeds expectations, such a conservative plan may not sustain a 30-year retirement.

The timing of asset liquidation is pivotal. Kamel explained that investments intended for long-term growth can weather market downturns better than funds needed in the short term. If Sydney were to retire and the market experienced a 30% drop, her portfolio could shrink to $1.26 million, resulting in a withdrawal rate of 6% for her initial $72,000. This scenario could force her to sell shares during a downturn, exacerbating losses—a phenomenon known as sequence-of-returns risk. A poor market performance in the first year can have more severe consequences than one occurring later in retirement.

Alternatively, Kamel suggested that Sydney could set aside five years’ worth of expenses, approximately $360,000, in cash, CDs, or short-term Treasuries. This strategy would allow her to maintain her stock investments during a market downturn, thereby preserving her potential for growth while covering her immediate financial needs.

To effectively manage her retirement finances, Kamel recommended that Sydney assess her income gap by calculating her anticipated annual expenses and subtracting her expected Social Security benefits. The average retired worker is projected to receive around $2,170 per month in 2027, which should be factored into her financial planning. Additionally, she should determine her withdrawal rate by dividing her annual income gap by her total savings, as a higher percentage indicates less flexibility in the face of market volatility.

He also advised establishing a cash reserve one to two years prior to retirement, seeking higher interest rates than the national average, which is currently around 1.8%. The remaining investments should be diversified in growth funds, allowing for profits to replenish the cash reserve after strong market years and providing a buffer during weaker ones. This strategy aims to ensure that only a few years of spending are safeguarded while the rest is invested for long-term growth to support a potentially lengthy retirement.

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