37% of baby boomers have more stock exposure than they should, Fidelity says. These 4 tips can help


Simon Potter | Getty Images

When it comes to stocks, investors face a big question: How much exposure is enough?

For investors already in retirement, how well they answer that question may have big consequences for how well they reach their goals.

“About 37% of boomers have more equity than we would recommend for their particular life stage,” said Mike Shamrell, vice president of thought leadership at Fidelity Workplace Investing.

Baby boomers — who are currently 59 to 77 years old and typically already in or near retirement — face tight time horizons for when they need to draw from their nest eggs.

More from FA Playbook:

Here’s a look at other stories impacting the financial advisor business.

Some boomers may be tempted to take on more risk due to guaranteed income from pensions or Social Security checks that cover their expenses. Others may be driven to try to make up for lost time if they feel their portfolios have fallen short of what they need.

At Fidelity, the allocations to equities in retirement funds are about 10% higher than where they should be, Shamrell said. The firm’s conclusion is based on comparing investments with the equity allocations it recommends in its target date funds, which provide a mix of investments according to specific retirement-age goals.

The good news for almost half of boomer investors — 48% — is their allocations are on track, according to Shamrell.

How to budget, invest and catch up on retirement savings

Some of those investors with excess stock exposure may simply need to rebalance after recent market highs, Shamrell said.

Experts say having the right mix of equities can go a long way toward helping retirees meet their financial goals.

“Everybody should have at least some equities,” said Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida. She is also a member of CNBC’s Financial Advisor Council.

Yet, there are some important factors to consider when gauging the right investment mix and adjusting those allocations as necessary along the way.

1. Assess downside risks

When meeting with clients, financial advisors typically come up with an investment policy statement, which outlines the investing goals and asset allocations needed to get there.

Importantly, a client’s personal circumstances drive these goals, McClanahan noted.

Clients typically fall into one of three groups: those who have more than enough money for retirement; those who are close to having enough, but who need to carefully manage their investment risk; and those who are not prepared.

For the latter group, McClanahan typically advises working longer and making spending adjustments.

Everybody should have at least some equities.

Carolyn McClanahan

founder of Life Planning Partners

For the middle group, who are close to enough, crafting a careful investment strategy is essential, she said. Importantly, that may mean curbing the instinct to take on more risk to catch up.

“Sometimes people feel like, ‘If I make more money, I’ll be able to spend more money and do better,'” McClanahan said.

“We have to show them the downside risk of that — you can likely lose a lot more money and then you’re not going to be OK,” McClanahan said.

2. Identify an investment sweet spot

Carl Smith | Getty Images

To pinpoint your ideal level of exposure to stocks, there are two important factors to consider: your ability to take on risk and your time horizon.

“No one can predict with any level of certainty how long you’re going to be around,” said Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group.

“There are plenty of people who are 80 or 82 today who will go on for another 20 years,” he said.

Consequently, not investing in equities is “not prudent,” he said. That goes not only for a 20-year time horizon, but also for shorter five- or 10-year time frames.

Though time horizons cannot be pinpointed precisely, investors can decide how much risk in the markets they can and should stomach.

Most of McClanahan’s clients who are in their 70s have a 40% stock allocation, she said.

However, the ideal level of exposure depends on their goals and risk appetite. While some investors may welcome a 40% stock allocation to grow the money they hope to leave to their children, others may be more comfortable with just 20% in equities so they can preserve their money for the same goal, McClanahan said.

3. Beware the risks of ‘play’ money

Equity exposure should be appropriately diversified, such as through a mix of U.S. large cap and small cap, international large cap and small cap low-cost passive funds, McClanahan said.

Retirees who feel they are appropriately invested may want to dabble in stock picking with a small sum. But McClanahan cautions that kind of activity may have unintended consequences, particularly following recent market highs.

One of the most important ways to make sure you’re going to do well in retirement is good tax management.

Carolyn McClanahan

founder of Life Planning Partners

One client recently used $30,000 to invest in stocks, got lucky in the markets and sold to preserve her gains, McClanahan said.

But that move left the client with $8,000 in short-term capital gains she had to pay taxes on at regular — rather than lower long-term — rates, she said.

What’s more, that additional income may prompt the client to have to pay higher rates on Medicare Part B premiums.

“One of the most important ways to make sure you’re going to do well in retirement is good tax management,” McClanahan said.

4. Staying the course is ‘usually your best friend’

marekuliasz | iStock | Getty Images


Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button