Baby Boomers and Stock-Market Risk: Striking the Perfect Portfolio Balance

As the baby boomer generation approaches retirement, a note of caution arises concerning their stock holdings.

Presently, a significant 37% of baby boomers maintain a higher level of equity holdings than advised by Fidelity Investments for their life stage. This insight comes from Mike Shamrell, Fidelity’s Vice President of Thought Leadership.

Baby boomers, born between 1946 and 1964, are either nearing or have already entered the retirement phase.

The average proportion of equity in baby boomers’ Fidelity retirement accounts currently sits at 65.8% as of the second quarter, comfortably falling within Fidelity’s recommended equity range of 47% to 67%.

However, a careful warning is extended to the 37% of baby boomers who carry a more significant exposure to equities. After recent market gains, these individuals should consider rebalancing, as recommended by Shamrell. The S&P 500 has recorded an increase of approximately 17% this year.

Derek Pszenny, Co-Founder of Carolina Wealth Management, emphasizes the importance of retirees thoroughly assessing potential risks, including the risk of outliving their funds, inflation, and establishing a sustainable withdrawal rate from their retirement accounts.

“Investing is dependent on time, not just age,” notes Pszenny. “The more you withdraw, the greater equity exposure is needed.”

Fidelity’s recommended equity holdings offer a range within 10% of the Fidelity Equity Glide Path calculation. A tool is available to estimate the time until retirement and determine the suitable portfolio distribution for individuals nearing retirement.

For example, if retirement is anticipated within a decade, the tool suggests that Fidelity Freedom 2035 currently holds 79% equity. This indicates that a portfolio with equity ranging from 69% to 89% would be considered appropriately aligned with the stock market based on the time until retirement.

“These are suggested levels, tailored to individual uniqueness and distinct goals. These are recommendations,” clarifies Shamrell. “Take the time to assess and find the level that brings you peace of mind.”

It’s important to note that many baby boomers may still possess pensions alongside their 401(k) plans and other investments such as real estate. Due to their entry into the workforce before the emergence of 401(k) accounts, auto-enrollment, and target-date funds, this demographic might find themselves less aligned with younger investors, as explained by Shamrell.

Fidelity’s target-date funds extend an investor’s retirement plan throughout their lifetime, surpassing the actual retirement date.

“Investors may experience 15, 20, or even more years of retirement. Preventing the depletion of savings prematurely is critical,” emphasizes Shamrell.

A fundamental tenet within the realm of investments suggests that as investors approach their retirement goal, a gradual reduction in equity exposure is advisable. For baby boomers nearing retirement, this translates to a shift from stocks to bonds or cash, as outlined by the Vanguard Group, another investment advisory firm.

“While age might impact the mix of asset allocation, it’s essential not to be swayed solely by averages and trends. There’s no universal formula for investors. To determine the optimal asset allocation mix, investors – irrespective of age – should factor in their goals, time horizon, and risk tolerance,” explains Nilay Gandhi, a Senior Wealth Adviser at Vanguard.

“For investors deliberating when and how to pivot, consulting a financial adviser can be beneficial. Timing retirement can be intricate,” recommends Gandhi.

For the typical retiree, Pszenny suggests an equities exposure ranging from 50% to 75%, accompanied by an annual withdrawal rate of 4% to 5%.

“I’m quite confident that they can meet their retirement goal without depleting their savings,” Pszenny asserts.

Pszenny raises concerns about target-date funds due to the common misconception surrounding the fund’s time frame – whether it guides individuals to their retirement date or spans their entire lifetime.

“The most crucial investment decision revolves around asset allocation. Each individual should determine the quantity of equities they hold and how it’s allocated,” Pszenny concludes.