Consider the stereotype of stodgy old codgers, set in their ways. Unable or unwilling to accept changes and handle risk, these overly cautious folks allow opportunities to pass them by. Could this stereotype fit baby boomers in their approach to retirement? Perhaps, given that a new survey from Legg Mason suggests that boomers are falling short on their retirement savings goals due to an overly conservative investment approach.
The survey, conducted among baby boomers between the ages of 53 and 71, found that the average boomer expects to need $658,000 to be able to retire. Unfortunately, the average boomer only has $263,000 saved within their defined contribution plans (such as 401k plans). Social Security and other retirement income streams are unlikely to cover the gap completely.
According to the survey, boomers definitely have a conservative portfolio on average. Cash and fixed-income investments make up the majority of fund allocations (30% and 22% respectively). Only 24% of assets are assigned to stocks. The remaining 14% of assets are divided up among real estate, gold and precious metals, non-traditional investments, and other unclassified investments. Many financial advisors would suggest a larger holding in stocks, even when entering retirement.
What should boomers be doing instead? There is no single right answer – and the above strategy may well be the proper one for you based on your expected retirement goals and risk tolerance.
Low risk tolerance may explain the conservative boomer approach, especially given that the Great Recession hit many boomers hard. They may have been partially scared out of the market, thus missing the subsequent rebound and suffering a double whammy. Boomers lost out on recent gains, knocking them off pace to reach their goals – and now that retirement is even closer, they fear another bubble could strike. It's difficult for them to shift their portfolio to the higher-risk stocks required to close the gap.
If you fall in the fearful category, there's no reason to make yourself miserable with riskier investments – but you may have to adjust your retirement goals downward or work longer than you would prefer to meet that goal. However, assuming you have a higher risk tolerance, you should review your retirement asset trajectory to make sure that you are on track to meet your goals and adjust your investments accordingly if you are not.
Start by re-evaluating your retirement goals. Have your plans for retirement changed? How much should you save to retire as a generic target, and how much will a change in plans affect your retirement target? Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.
Fidelity offers a rule-of-thumb approach based on average salaries. They suggest aiming for a scaled factor based on your salary. At age fifty, you should have saved 6x your actual salary. The factor is seven at age 55, eight at age sixty, and ten times your annual salary by age 67. This assumes that you maintain your pre-retirement lifestyle. Unless you alter your expected retirement age, the savings factor must be adjusted up or down depending on your goals.
The classic balance between aggressive growth investing (stocks) and conservative investments (bonds) is 60% stocks and 40% bonds, with declining stock holdings as you reach retirement. If you are short of a goal, you will need to shift your investments further toward equities, but do so with care. Plenty of resources are available online to help you decide. If you are uncomfortable with online advice – as stodgy old codgers might be, we say with a smile – seek face-to-face advice with a qualified financial advisor.
Regardless of your approach to retirement finances, you should periodically review your retirement goals and your likelihood of reaching them. Make your adjustments earlier and more often, and avoid nasty economic surprises as retirement approaches.