Not too many years ago, many retirees believed it was OK to be a stock market investor in your working years, but after retiring, it was critical to keep assets safely away from the market's inherent risk and volatility.
Today, for many reasons, many older adults realize that they must continue to keep funds in the market as they near retirement, and after retiring.
This represents a change in thinking about retirement, and about life, says Peter Maris, founder and principal of Wilmette-based Resource Financial Group.
"A lot of people think of retirement as a finish line," he says. "But they should think of the end of their lives as the finish line. People are living longer now. And for many people today, the end of life means age 80 or beyond. That's long-term, which means there needs to be stock market exposure."
Put differently, fear of losing money in the stock market kept older adults out of the market, says Richard Hohol, principal of Chartered Consultants Inc. in Roselle. "Today, that's been replaced by fear of running out of money," he says.
As retirees' philosophies have changed, so too has the guidance of financial advisors, says Lynnette Khalfani-Cox, the Mountainside-N.J.-based founder of AsktheMoneyCoach.com.
For decades, many wealth managers and financial advisors counseled retirees and pre-retirees to keep some money in the stock market, she reports. "What's changed over the past decade or so is their advice that older folks keep more money in the market than they might be comfortable with," she says.
Overruling "Rule of 100"
Many wealth managers and financial advisors formerly touted following the "Rule of 100," in market exposure. That principle holds that to determine the optimal stock market exposure, you subtract your age from 100. Someone at age 40 could afford 60 percent in the market; someone 70 just 30 percent.
"The idea was that as you got older, you'd dial back your stock market exposure, to have less risk," Khalfani-Cox says. "The thinking is still that you should be getting a little more conservative as you age. But a number of factors are working against older Americans if they don't keep more in the market."
Here are a few of those factors:
Richer lives require greater riches. Not only are people living longer these days, but they're living more fulfilling lives than older people once did.
"You can be 80 and still traveling around the world," Khalfani-Cox says. "You can be 90 and have a hobby that requires some money. The idea is people need to have money at later points in their lives, and not just in the early and mid-phases when they're raising a family."
Purchasing power risk. Historically, inflation has cut the value of money in half every 20 to 25 years, says Richard Barrington, a senior finance analyst with MoneyRates.com. That means that at your retirement date, you have a decent chance of seeing the purchasing power of your nest egg cut in half. "The way you fight that is by having a growth component in your portfolio," Barrington says. "That's equities."
Fixed-income erosion. Money market or savings accounts once yielded four or five percent, and bonds six to ten percent, Barrington says. But today, a 10-year treasury bond is below two percent, and money market and savings accounts are earning 20 basis points, a fifth of one percent.
"Ironically, stocks are producing more yield these days than bonds or savings accounts," Barrington adds. "Even in 2008 and 2009, when stocks declined precipitously, more companies in the S&P 500 increased their dividends than decreased or stopped their dividends all together.
"If you'd been focusing on the income production of stocks, that income production would have been surprisingly stable, even during what we hope is the worst-case scenario we ever will live through."
Rising health care costs. The X factor for many people, the factor they can't necessarily predict, is their health. But one can count on health care costs rising, and long-term care costs being astronomical, Hohol says.
"It becomes even more important to build up cash reserves," he argues.
Change in retirement funding. The parents of many boomers could count on a pension provided by the employers for whom they worked their entire adult lives, Khalfani-Cox says. But the defined benefit plan model has been replaced by the defined contribution plan model for many boomers.
"You'd think participation in 401k plans would be 90 percent, but it's not," she adds. "You're going to need your money to go further."
How, and how much, to get in
If you're not in the stock market, or not sufficiently invested there, you need a strategy to get in and stay in. Some experts advise dollar cost averaging into the market. Deposit a fixed amount of money at fixed intervals, such as each month, in low-cost, no-load mutual funds, Khalfani-Cox advises.
In so doing, she says, you're diversifying and also gradually getting comfortable with higher-risk, higher-return investments. Moreover, dollar cost averaging garners you more shares at a lower average price point.
Others advise a different approach.
"Dollar cost averaging can take a long time, and it may make more sense when you're still saving for retirement," Barrington says.
"Set a limited time frame, say two or three years, where you're opportunistically getting in on dips in the market and in individual stocks.
"You're wading in, but not taking forever to do it."
As for how much to invest, Khalfani-Cox suggests not living by the Rule of 100. For instance, you might invest more in stocks than 30 percent at age 70, if you can do so without losing sleep. "I do think your entrance into and willingness to stay in the market has to be driven by your own comfort zone," she says.
Finally, once in, avoid being swayed by market movements, Maris says. "With the stock market moving higher, some of my clients are now inquiring, 'should we be more aggressive?'" he says. "In bad times, they were asking, 'should we be less aggressive?' If you are 70-30, be 70-30 at all times."