Financial Literacy - Retirement income planning
retirement
Should investors over age 50 own stocks?

Last year, target-date funds suffered significant losses, catching investors and government officials by surprise. The average loss in 2008 among 31 funds with an imminent 2010 target date was nearly 25 percent, according to the Securities and Exchange Commission.

That led Congress early this year to impel the SEC to take a closer look at whether these funds perform as advertised and whether more regulation is necessary.

It also led to some rethinking in the retirement plan industry about the composition of these funds. Charles Schwab announced in April that it was making changes to its target funds, in part because of "current interest in more conservative investment options," says Peter Crawford, senior vice president for investment management services, in a news release.

The firm increased the bond holdings in its Target 2015 and Target 2010 funds by 4 percent and 10 percent, respectively, from the previous year. Bonds typically provide stability in rocky markets. Currently the Target 2015 fund has 39 percent in bonds and the Target 2010 has 50 percent in bonds. However, the firm decreased bond allocations for target funds with longer time horizons.

Meanwhile, T. Rowe Price practices what it preaches by allocating more stock to its own target funds. The Price Retirement 2015 fund holds 29 percent in bonds, while its 2010 fund holds about 37 percent in bonds as of June 30.

Price's Ward thinks target-date funds are a good option for investors who take the time to understand how they are structured and what happens at retirement date and beyond.

"What target funds do is, they take care of the investment decision," she says. "It's diversified and has an asset allocation that should be appropriate for your time horizon. But then you still need to understand what happens in that target-date (fund)."

But some experts say that feature may be a detriment to investors who should be tweaking their equity allocations periodically.

"Things may change and it may make a lot of sense to reallocate and have a more aggressive or more conservative mix that the target fund doesn't really allow you to accommodate," says Jeff Camarda, a Certified Financial Planner who heads Camarda Financial Advisors in the Jacksonville, Fla. area.

Camarda says investors should take a fresh look at their financial picture at least once a year and rebalance their portfolios if necessary.

Because target-date funds hold a mix of stocks, bonds and cash, they'll be more sluggish than pure equity funds in a market rebound. Ibbotson Associates, a division of Morningstar, recently analyzed the performance of 312 target-date funds and their returns for the quarter ending June 30. Funds with a 2010 target date rose by nearly 12 percent on average, while 2050 funds climbed 19 percent.

Should everyone own stocks?

For some people, the decision whether to own stocks may be irrelevant, especially if they have too little saved in their retirement accounts or their anticipated cash-flow needs in retirement are so high that they can't take the risk.

"If you've got $1 million and you only need to spend $30,000 to supplement your pension, you only need 3 percent of that $1 million (each year). You can afford to invest more aggressively with a longer term perspective because you won't be forced to sell at steep losses in order to buy your bread this week," Camarda says.

"On the other hand, if you need to take 7 percent of your portfolio each year to live on regardless of what the stock market is going to do, you simply just can't take the risk and you need to be focused on fixed income."

Julie Jason, author of "The AARP Retirement Survival Guide," says stock allocations should be structured based on the future spending demands of the portfolio.

"Somebody who is retired and needs X number of dollars per year should start with that calculation and work backwards into how much should be in stocks and how much should be in bonds and cash," says Jason, who directs the investment management practice of Jackson, Grant Investment Advisers in Stamford, Conn.

"In the real world, you need to know how much income you need to produce, and what you have left over is what goes into growth (stocks). Otherwise you are speculating and doing yourself a disservice.

"Cash flow is the key for anyone going into retirement. Cash flow determines how much you should have invested in stock. Cash flow determines whether or not you'll have enough money to live on. Cash flow determines whether or not you'll be happy when you retire, and cash flow is the easiest thing to figure out," she says.

"That is the message for anyone who is trying to figure out whether they should be buying stock if they're 50 or older." 

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