The risk is real.
Far too many workers are taking unnecessary risks with their retirement savings by putting too much of their money into stocks, according to Fidelity’s Q3 2019 Retirement Analysis, released this week.
“Although an increasing number of workers are leveraging target-date funds to keep their asset allocation on track and help manage the risk to their retirement savings, Fidelity’s Q3 analysis found that many 401(k) account holders had stock allocations higher than those recommended for their age group,” the report concluded.
For boomers, that’s particularly true. Indeed, 37.6% of boomers had more stock than advisable in their 401(k) — and that includes 7.9% of them who are 100% in equities — compared with just 18.6% of Generation X and 17.2% of millennials who hold more stock than is advisable, Fidelity’s analysis revealed.
“There’s a risk to this, especially for boomers,” Meghan Murphy, a vice president of thought leadership at Fidelity, tells MarketWatch. “The concern there is they are already in or approaching retirement and need to be thinking about guaranteed income streams. There’s not a lot of time for recovery.”
So how much is too much when it comes to equities? That depends on, among other factors, age and when you want to retire. For Fidelity’s calculations on whether people were overexposed to equities, they used their Fidelity Freedom Funds calculator. Using that, for example, they’d recommend that someone who is 55 now, and wants to retire in 10 years, should have 42% in domestic equity funds, 28% in international equity funds, 30% in bond funds and 0% in short-term funds.
There’s also a common rule floating around that you should subtract your age from 100 and put that amount into equities; so if you are 35, you’d have 75% in equities, for example. But many experts say that advice isn’t great.
“The old formula of 100 minus your age going into stocks is no longer the best plan for most people,” says certified financial planner Bobbi Rebell, host of the Financial Grownup podcast and co-host of the Money with Friends podcast. “In fact any plan that does not take into account financial goals and risk tolerance is outdated. And any percentages that someone chooses can be adjusted- not just in how they are invested, but when the time comes, in how much comes out. If an investment isn’t earning as much, people can adjust their lifestyle in order to maintain financial security.”
Mitchell C. Hockenbury, a financial planner at 1440 Financial Partners in Kansas City, says he doesn’t like the rule either: “I believe it all depends on what the money is to be used for and when. Many clients aren’t retiring at 65, not because they can’t afford to, but because they are good at what they do and enjoy it. So age-based rules of thumb on equity percentages don’t work so well.”
If someone does find themselves overexposed to equities, Rebell says they “can and should move some money out of equities but they just need to be comfortable with the adjustment in the timeline to meeting their financial goals.”