Retirement account balances cruised to record levels in the decade since the Great Recession's market bottom, which is great news if you're seventysomething and less so if you're younger.
People about to retire could be positioned for disaster if the long bull market ushers in big losses in those critical first few years of portfolio drawdowns. Their kids, meanwhile, have been paying ever-rising prices for the stocks in their 401(k) plans over the last 10 years.
"It's only reasonable to start preparing, both mentally and financially, for a market that goes down and stays down. And goes down some more," Christine Benz, personal finance director for Morningstar, warned recently. Or as her podcast guest, author and investment firm founder William Bernstein, said: "If you've won the game, stop playing."
Benz advises retirees to commit two years' worth of retirement income to cash, another eight years to bonds and the remainder to stock holdings. To further cushion the nest egg, she recently suggested that retirees double-check their stock holdings to make sure they are diversified across different asset classes and to consider some so-called low-volatility investments, such as exchange-traded funds focusing on companies with strong dividend track records.
Not everyone agrees bonds are safe given a generally rising interest rate environment, but the current pause on rate hikes and overall economic sentiment is creating some attractive yield on high quality, short-term bonds, investment experts say. Even high-yield savings accounts are paying more than 2.3 percent, according to Bankrate.com.
Your own best strategy will vary widely depending on how much growth you need from your retirement savings, among other factors, but the sentiment about being aware of how much risk you are carrying is particularly important now.
Nearly 22% of employees in workplace savings plans are invested too aggressively, a recent Fidelity Investments report found. And among the generations, baby boomers are the most likely to have too much invested in higher-risk securities, Fidelity said.
About 8% of Boomer retirement accounts are 100% invested in stocks, said Meghan Murphy, a Fidelity vice president. Across all ages, about 14% are over-allocated to stocks, she said.
There are a couple of caveats. The Fidelity report couldn't discern investors' overall holdings, so some of those 100-percent stock 401(k) accounts might be balanced by more conservative IRAs or a spouse's workplace plan, for example.
Savers should also be aware that much of the investment risk in today's retirement plans is driven by the huge flow of assets into target-date mutual funds that automatically rebalance their mix of stocks and bonds.
That can keep investors from becoming overly invested in stocks during big bull-market runs, but they need to understand there is a fairly significant difference in the risk profiles among these funds. A recent Morningstar report points out that while American Funds and T. Rowe Price have similar overall stock/bond mixes among their target-date funds, American Funds held more U.S. stocks as opposed to international ones, compared with T. Rowe. These sub-categories matter over time.
Overall, though, the Fidelity report shows that for people who have access to a workplace retirement plan, the numbers are getting better:
_Total savings rates _ employees' and employers' contributions combined _ reached 13.5% in the first three months of 2019.
_Boomers' average balances grew to $357,200, an increase of 367% in the decade since the market bottom in 2009. Two-thirds of that gain was due to market performance.
_Gen X savers accrued an average balance of $268,900, up 626 percent, with 57% of the gain attributed to market performance vs. contributions.
_The average millennial account grew to $129,800, driven mostly by contributions.
Concerned about measuring up? Think about your own savings as a multiple of your income. Fidelity suggests saving three times your current income by age 40 and 10 times income by age 67, though these are very rough guidelines. Doctors and other workers with long education paths or lower-income workers whose retirement income will be covered mostly by Social Security will have different paths.
