The Biggest Risk You're Taking With Your Retirement Nest Egg
Investors can afford to be aggressive when they're younger. But in their 50s or 60s? That aggressive manner should be mellowing down.
Yet the vast majority of investors who are approaching retirement age are way too heavily invested in stocks. Investment company SigFig recently analyzed the asset allocation of more than 30,000 investors and compared that to their ideal allocation, based on their risk profile and investment horizon.
The results: across all age groups, investment portfolios were too heavy on equities and too light on fixed income. Of baby boomers, only 3 percent of those in their 50s and 2 percent of those in their 60s had an allocation to fixed income investments that corresponded to their age risk tolerance, as determined by SigFig's questionnaire and an estimate of a well-balanced allocation.
Bonds? What Bonds?
A study released earlier this year by the Investment Company Institute, a mutual fund industry group, found that a third of investors in their 50s had 100 percent of their IRA accounts in stocks -- and so did a quarter of those age 60 to 64.
For boomers easing into retirement, having 100 percent of their portfolio in equities probably doesn't feel too reassuring at times like the first half of this December, when the S&P 500 (^GPSC) fell more than 3.5 percent. More importantly, it's a risky strategy. You don't need to look back further than 2008-09 to know why.
Why the Love of Stocks?
- It's the great recession, stupid. Investors, especially those boomer-age and up, are still feeling the effects of the market crash in 2008-09. According to the Federal Reserve, Americans saw $1.3 trillion of wealth vaporize in the first quarter of 2009 alone. Many older investors saw their retirement portfolios shrink so much that they might still be heavily invested in equities to make up their losses.
- Bonds are boring. Investing in Apple (AAPL) is sexy. Investing in Treasury bills is just not. Stocks are easier to understand and to follow online. Bonds, with their multiple maturity rates, yields, prices and other factors to follow, can be head-scratchers. Most Main Street investors lack a deep knowledge of bonds.
- Bond yields are low. The yield on the benchmark 10-year Treasury dropped to 2.07 percent this month (as of Dec 16, 2014): a 19-month low. That's due to factors ranging from tame inflation to slow global growth, and many investors end up chasing higher returns elsewhere.
Despite all that, simply ignoring fixed-income investments is a big mistake, especially for those approaching retirement.
- Review your asset allocation now. The end of the year is a great time to do this, anyway. Are you too heavily invested in stocks? If you're over 50, your retirement nest egg probably shouldn't be invested in 100 percent of any one asset class. That doesn't mean you should give up on equities, of course. Jane Bryant Quinn, a personal finance expert at AARP, cites one investing strategy that recommends a 55 percent allocation to stock funds for 65-year-old investors. That might sound aggressive -- and it might be for some risk-averse investors. But with life expectancy and working careers extending, investors can afford to absorb more market swings and need more cash to make it through a lengthy retirement.
- Get a fix on your fixed income. Take a look at all the low-risk sources of money you can get, including Social Security, a pension, lifetime-payout annuities, inflation-adjusted bonds, short-term bond funds and certificates of deposit. All your essential expenses during retirement should be covered by these investments. Consider it your "safe" money.
- Rethink your expenses. If the "safe money" won't produce enough income to cover your basic expenses, rethink and reduce those expenses. You shouldn't gamble on stocks to cover them.
As the great recession showed us, ignoring boring fixed-income investments can cause you many sleepless nights in a bear market. With age should come wisdom, and that means building a smart portfolio that's safe enough to keep you going through the many decades of your golden years.
Vanessa Richardson is a contributing writer at SigFig. Nearly a million people use SigFig to track, improve and manage over $300 billion in investments.