Many baby boomers are betting too much on stocks with their retirement savings, a recent Fidelity Investments report found, emboldened by the historic market returns over the last decade.
More than a third of boomers – 37.6% – are overly invested in the stock market in their 401(k) accounts, Fidelity found, with 7.9% holding 100% in stocks. Overall, almost a quarter of all 401(k) savers were overweighted in the stock market.
“This can happen pretty easily. If we look back five to 10 years, the market has been climbing,” said Meghan Murphy, vice president at Fidelity. The Standard & Poor’s 500 index has jumped 360% since bottoming out in 2009.
“As [boomers] get closer to retirement, it is typically those who don’t use target-date funds where we see the most exposure to [stocks],” Murphy said. These funds rebalance your investment selection over time to match your risk tolerance and age.
Those invested too aggressively in stocks could lose their nest eggs if the market tanks. They also would have a harder time recovering those losses before or during their retirement.
Right amount of stocks
The closer you are to retirement, the more conservative your portfolio should be, most experts recommend. That means more investments in bonds and cash over stocks.
If you’re 20 years from retirement, Fidelity recommends investing 90% of your retirement savings in stocks. If you’re only 10 years away, invest just 70% in the stock market. If you’re about to retire, you should have only 53% in stocks.
“While everyone likes to see their balance grow,” Murphy said, “you have to be comfortable to check [your] exposure” and tweak your investments as you age.
But there are exceptions.
The case for stocks
“Stock-heavy portfolios are fine for baby boomers that can stomach the risk and volatility,” said Jeff Rose, founder of the financial blog, Good Financial Cents. “Additionally, they might have an income need where having a high weight in stocks makes sense.”
Often, boomers invest in less risky stocks anyway, Rose said.
“They’re looking for those with a high dividend,” which are earnings distributions that companies pay their shareholders, Rose said. “They’re not trying to buy biotech stocks or IPOs.”
Dhara is a writer for Yahoo Finance. Follow her on Twitter @dsinghx.