Navigating Stock-Market Exposure: Finding the Right Balance for Baby Boomers

As the baby boomer generation approaches retirement, it may be prudent to exercise caution when it comes to their stock holdings.

At present, a notable 37% of baby boomers maintain a higher level of equity holdings than Fidelity Investments recommends for their life stage, according to insights from Mike Shamrell, Fidelity’s Vice President of Thought Leadership.

Characterized as individuals born between 1946 and 1964, baby boomers are either near or within the retirement phase.

The average proportion of equity in baby boomers’ Fidelity retirement accounts stands at 65.8% as of the second quarter. This figure falls comfortably within Fidelity’s suggested equity range of 47% to 67%.

However, a word of caution is directed towards the 37% of baby boomers who possess more substantial exposure to equities. Following recent market gains, these individuals might consider rebalancing, advised Shamrell. The S&P 500 has gained around 17% so far this year.

Derek Pszenny, Co-Founder of Carolina Wealth Management, emphasized the need for retirees to carefully assess various risks such as the possibility of outliving their funds, inflation, and determining a sustainable withdrawal rate from their retirement accounts.

“Investing is time-dependent, not necessarily age-dependent,” Pszenny noted. “The more you withdraw, the more equity exposure you need to have.”

Fidelity’s recommended equity holdings do not provide an exact figure, but rather a range within 10% of the Fidelity Equity Glide Path calculation. A tool is available to estimate the time until retirement and the suitable portfolio distribution for an individual nearing retirement.

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

“These are simply suggested levels. Everyone is unique, with distinct goals. These are recommendations,” Shamrell clarified. “Review and determine the level that grants you peace of mind.”

It’s worth noting that many baby boomers may still possess pensions alongside their 401(k) plans, along with other investments like real estate. Given their entry into the workforce before the advent of 401(k) accounts, auto-enrollment, and target-date funds, this demographic could find themselves less aligned compared to younger investors, Shamrell explained.

Fidelity’s target-date funds project an investor’s retirement plan throughout their lifespan, extending beyond the actual retirement date.

“Investors might have 15, 20, or even more years of retirement. It’s crucial to avoid depleting your savings prematurely,” Shamrell emphasized.

A fundamental principle within the investment realm suggests that as investors draw closer to their retirement goal, they should gradually decrease their equity exposure. For baby boomers nearing retirement, this implies a shift from stocks to bonds or cash, as outlined by the Vanguard Group, another investment advisory firm.

“While age might influence asset allocation mix, it’s vital not to get caught up in averages and trends. There’s no one-size-fits-all for investors. To determine the optimal asset allocation mix, investors – irrespective of age – should consider their goals, time horizon … and their risk tolerance,” explained Nilay Gandhi, a Senior Wealth Adviser at Vanguard.

“For investors pondering when and how to pivot, seeking the counsel of a financial adviser might be beneficial. Timing retirement can be intricate,” Gandhi recommended.

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

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

Pszenny expressed reservations about target-date funds due to people often misunderstanding the fund’s time frame – whether it guides them to their retirement date or throughout their lifetime.

“The most pivotal investment decision is the asset allocation decision. Each individual should decide the quantity of equities they hold and how it’s allocated,” Pszenny concluded.

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