On a stomach-churning day in August, the Dow Jones Industrial Average dropped to an 18-month closing low in a trading session that saw the index briefly decline more than 1,000 points.
Then there was reason to celebrate: Days later, stocks recovered from losses and profits soared northward. And the up-and-down swings of the market continued into September.
With all this volatility, where do investors turn, particularly those nearing or in retirement?
Stock-driven investments are still considered to be one of the key components of a retirement portfolio, experts said. What’s also critical: knowing how much stock to hold, which stocks to own and for how long.
Why Stocks Matter
“Most people are going to want some type of growth (instrument) on their way to retirement and in retirement, since some of us could be around as long as 35 years after we retire,” said Craig Brimhall, vice president of wealth strategies with Ameriprise Financial.
Growth instruments include stock, real estate and businesses, he said. Generally, a mix of stocks and bonds are considered to be staples in a retirement investment portfolio.
Despite the turmoil that the market is experiencing now, Brimhall said, investors should view stocks as their retirement portfolio’s growth engine over the long term. Keep in mind, however, that investors’ stock holdings should lessen considerably as they move closer to their retirement date. Moving investments out of stocks can help avoid heavy losses in their portfolio just before they’re about to begin withdrawing funds from it.
Jeffrey Bogart, a registered investment advisor at Sila Wealth Advisory in Mayfield Heights, Ohio, added that stocks tend to bring higher returns, but “the price to pay for the excess returns is the volatility of the stock market.” Still, he said the “ups in the markets far outweigh the downs.”
Holdings by Age
When it comes to retirement planning, allocations should be largely driven by time horizons, said John Cavanaugh, a chartered retirement planning counselor with Cavanaugh Financial Group in Plymouth, Minn.
“For someone who has 20 to 30 or more years to retirement, it often makes sense to allocate 60 percent or more to stocks,” he said. “For someone closer to retirement, say five years or less, investment planning gets much more delicate. It’s natural to scale back the stock holdings: Often 40 percent or less makes sense.”
For those in or on the verge of retirement, a big market drop can steer a portfolio off course if their stock exposure was too heavy, Brimhall added.
Stocks for Retirement Income
As you enter retirement, you might want to stick with the assets you’ve held for the past 20 to 30 years, said Hanson, but you must change the allocation. Here are three types of holdings that he characterized as buckets:
- Bucket 1: short-term, more liquid investments, like cash, certificates of deposit and government bond funds
- Bucket 2: mid-term, moderate-risk investments, including balanced funds, real estate investment trusts and commodity-based funds
- Bucket 3: long-term, higher-risk investments, such as large cap stock funds, small cap funds, emerging markets and international stock funds
As you get closer to retirement, you might want up to 50 percent in bucket No.1. When you’re younger, you might only want 10 percent in bucket No.1 and up to 50 percent in bucket No.3, said Hanson.
Brimhall said he prefers dividend-paying stocks for a retirement portfolio. He also recommends them because, unlike corporate bonds that are taxed as ordinary income, stocks get preferential tax treatment and are usually taxed at a lower rate depending on your tax bracket.
Another important decision in your retirement planning is how much of your portfolio you will withdraw. Many planners recommend 3 percent to 4 percent annually to make sure your funds last 20 to 30 years or more.
Also, delaying claiming your Social Security benefit will boost your payout by 8 percent a year up to age 70. The maximum benefit for someone retiring at full retirement age, which is 66 or 67 for those born after 1959, is $2,663 a month.
Experts say it’s best to delay your claim if at all possible to get the biggest return and increase the size of your nest egg.