The Wild Ride of Retiring in a Bull Market
It’s official – the U.S. stock market is now enjoying the second-longest bull market in history.
This bull run started on March 9, 2009, and continues to maintain record-breaking momentum.
As a former broker for nearly 20 years, I have advised countless people on how to structure their portfolios. But this gives me pause…
When reflecting on Baby Boomers specifically, there’s much to consider – primarily, how much equity exposure should they have in their retirement accounts? Especially after such a long bull run.
But, before I delve into some answers, it’s crucial to address a bit of background information.
Too Much Is More Than Enough
Before this bull market gained steam, the S&P 500 Index lost 55% between October 2007 and March 2009. And Target Maturity Funds – which are supposed to be a safer investment – lost about 25% in that same time frame.
The 17-month span was devastating to many people approaching retirement. Why?
Because their portfolios were far too top-heavy in their exposure to stocks. According to the Employee Benefit Research Institute, nearly a quarter of investors between the ages of 56 and 65 had 90% of their portfolios in stocks. And more than 40% of these investors had over 70% exposure to stocks.
I have no doubt that this was due to many Baby Boomers trying to play catch-up while planning for their later years. In other words, not having saved enough during the earlier part of their lives, these Baby Boomer investors were seeking high yields on a limited time horizon.
The latest data suggests that this is a recurring problem.
Most people approaching retirement have too many eggs in the stock basket. In fact, one survey showed that 10% of these investors had a 100% allocation to stocks!
Here’s a tip from a Wall Street insider – this bull market will end, just as all previous bull markets have, and eventually, come to a close. But this time it may be detrimental to the savings you’ve counted on having in your golden years.
With retirement approaching, it’s crucial to take action to maintain your savings.
Forget the tired old formulas that said your stock allocation should be 100 minus your age. Or 120 minus your age.
My view is always different. My stock picks are always contrarian. And my sugges
tions for those nearing retirement age are not the norm. I like to call it “Smart Investing.”
I believe that, for two to three years before retirement and two to three years afterwards, the allocation to stocks should be low. Something in the 20% to 30% range. The rest should be parked in something safe, boring, and low-risk – like Treasuries.
That way, a crisis – like the one we saw play out in 2008 – won’t destroy what should be your golden years.
You may not get a major payday return. But at least your principal remains secure.
After that two- to three-year grace period has passed, however, your allocation to stocks should increase. I would, actually, advise raising it aggressively back to the 70% to 80% range.
The reason? Stocks do offer the best returns – in the long term.
With an increasing number of people living 30 years or more after leaving the workforce, growing your money is vital. And, once you’ve secured your retirement and maintained that security, you’ll be ready to take on a few more risks again.
No one wants to outlive their money – but it’s always a possibility, especially if the proper precautionary measures are not taken, and considering healthcare costs for the average couple in retirement are currently around a quarter of a million dollars.
When all is said and done, the bottom line is: Reduce your stock exposure in the five-year period around your planned retirement date. Then, once you’re comfortable in your post-workforce years, feel free to let loose and aggressively raise your allocation to stocks.
Just because you’re retired doesn’t mean you shouldn’t live a little!