How much is too much in stocks?

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How much money should you invest in stocks when you retire?

The jury’s still out on that, and it’s a huge retirement planning issue. Many money managers argue that if you are going to live another 30 years in retirement, then you are a long-term investor. And because of that, a substantial portion — some say 40 percent — of your retirement savings should be invested in stocks. Otherwise, the value of your savings will be eaten up by inflation.

But this week, Putnam Investments released an analysis from its newly formed Putnam Institute research group concluding that retirees should limit equity investments to somewhere between 5 percent and 25 percent as long as the investor’s primary goal is to not outlive his assets.

Putnam said:

“Once an investor begins withdrawals (from his savings), the greatest risk to his or her portfolio becomes a potentially unfavorable ‘sequence of returns’ — not inflation, or longevity.”

In other words, investing more than 25 percent in equities leaves an investor vulnerable if the market declines significantly, especially during the early years of the investor’s retirement because that decline puts a big dent in savings, reducing the amount available for the retiree to live on for the rest of his life.

Putnam was discussing this in relation to target-date funds, which often invest retirement funds in higher percentages of equities after the account holder has begun withdrawing his money. Putnam called the onset of withdrawals an investor’s “true” target date and said:

“It makes no sense to continue rolling down equity exposure past anyone’s true target date — and funds that do so are overly risky and misleading.”

There’s no question about it, deciding how to invest money in retirement is a huge challenge — even for people who are experienced money managers. No matter what you decide, there’s risk.