Many older investors took big losses when the market hit bottom last March because 40% of investors between 56 and 65 had 70% of their 401(k) accounts in stocks. So how should seniors approach stocks?
By the time the stock market hit bottom back in March, it had chalked up a 55% loss from October of last year. Many older investors took a big hit because their portfolios were top-heavy with equities. According to a survey by the Employee Benefit Institute, 25% of investors between 56 and 65 had more than 90% of their 401(k) accounts in stocks and 40% were more than 70% invested in stocks. Even after the recent rebound, those investors will need another 50% gain to break even.
Should older investors shun equities? Market historians point out that the average annual gain for stocks, going back more than 120 years, has been 7.6%, so that an investor with a longer time horizon shouldn’t be leery of the stock market. And as life spans increase, time horizons, even for those nearing retirement, are getting longer. Investors in their 50s, they say, should have between 65% to 75% of their portfolio in equities.
Other analysts, however, caution that a stake that large could prove too risky. Some financial advisers suggest basing stock allocation on anticipated retirement cash flow needs. If you have a $2 million nest egg and you can live on a drawdown of 3% a year, or $60,000, market gurus suggest that you can be aggressive with stocks because you can take a longer-term outlook -- you won’t be forced to sell at fire-sale prices to meet everyday expenses. If you think you’ll need to pull out more from your nest egg, on the other hand, you need to zero in on investments that will give you income without too much risk.