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Recently, I was alarmed by new data showing how people in their 50s and 60s are investing for retirement.
Roughly a third of "consistent traditional individual retirement account (IRA) investors" in their 50s — 31% of those age 50 to 54 and 29% age 55 to 59 — have 100% of their IRA money in stocks, according to the Investment Company Institute, the trade group for mutual funds.
A quarter of these IRA investors (defined as ones with IRA accounts in every year between 2007 and 2013) age 60 to 64 have all their IRAs in stocks, too.
Not what you'd call a well-diversified portfolio, on the face of it. "It does seem high, no doubt about it," said Wade Pfau, Professor of Retirement Income at The American College in Bryn Mawr, Pa., the largest nonprofit educational institution devoted to financial services.
And on days like April 10, when the Dow (.DJI) fell 1.6% and the Nasdaq (.IXIC) plunged 3.1%, owning just stocks can be just joyless. Some market analysts, such as Henry Blodget, believe we may be watching the start of a market crash.
After speaking with Pfau and a few other smart financial analysts, however, I'm a little less concerned about the investing habits of pre-retirees — but I still think there's room for improvement.
I wanted to pass on the retirement-investing advice I heard.
The reason the IRA numbers aren't as bad as they seem is that they don't provide a complete picture of their investors' total retirement portfolios. It's possible, for instance, that those same investors hold bonds in their 401(k) plans or other accounts.
"The statistics are a little narrow," said Ric Edelman, author of The Truth About Retirement Plans and IRAs and Chairman and CEO of Edelman Financial Services, based in Fairfax, Va. "When you go broader, the statistics I'm seeing show that Americans have, on average, about half of their money in equities."
Pfau is a perfect example of why these IRA numbers can be deceiving. "My IRA is 100% in stocks as well, but my overall asset allocation is not."
Said Edelman, who's also a popular financial radio show host: "I'm more interested in whether you're saving for retirement. I'm not terribly concerned about how the account is registered."
Edelman told me that the data showing many pre-retirees have most of their money in stocks (or mutual funds that own them) "is good news, not bad news."
He said that he's found, after managing money for more than 25 years, that "when people fail financially, it isn't because they take too much risk with their money, it's because they don't take enough risk."
By keeping too much of their money in bank CDs and bonds, particularly when they're paying so little these days, Edelman said, "people run the risk of running out of money."
Edelman thinks your retirement portfolio should tilt toward stocks because equities have outperformed all other investments over the long term.
"There's no reason to believe that isn't going to continue to be the case over the next 20, 30 or 40 years," Edelman said. "And because of the cost of living that retirees incur, particularly with health care, it's vital that they continue to earn a competitive rate of return — which they can't do in today's low interest rate, fixed income world." When interest rates rise, Edelman said, it'll be time to re-evaluate this strategy.
But what if the market tanks when you're newly retired? Won't retirees whose portfolios are stock-heavy face financial problems as a result? "Only if they sell while prices are low," said Edelman. "And that's the important point: If you're going to be heavily invested in stocks, you must maintain a long-term perspective."
But if you don't have the temperament for that and weaken when the market drops, keep your stockholdings down.
"If you know that you get seasick, you shouldn't go deep sea fishing," said Edelman. "But if you can tolerate the swells of the currents, you can have a fun time. It's the same with the stock market. As long as you realize that volatility is an inherent part of investing in stocks and you are prepared to wait it out, the volatility works to your favor."
Dan Keady, Director of Financial Planning at TIAA-CREF (a financial services firm for nonprofit employees), said his concern was about how few Americans are investing in IRAs for retirement these days.
According to a study TIAA-CREF recently published, 17% of the public now contributes to IRAs, down from 22% in 2012. "With the economy improving, you might expect more people to contribute, not less," said Keady. (Just 20% of those age 55 to 64 are contributing to IRAs.)
One reason for the drop-off may be that growing numbers of Americans are able to invest for retirement through employer-sponsored 401(k) and 403(b) plans. And employers offering those plans are increasingly making it easier to contribute and to raise your contributions.
According to a report published last year, 56% of 401(k)s have automatic enrollment, meaning you have money taken out of your paycheck unless you tell your employer not to.
Many 401(k) plans also match a portion of their employees' investments, something an IRA can't do, so you get an automatic return just by participating in the plan.
But here's another likely reason: IRAs are just too darn complex.
Even Keady, a certified financial planner and retirement-planning specialist, says he has to keep a clipboard on his desk to keep track of who's eligible to open an IRA and deduct contributions to one.
The rules vary enormously depending on your income, your age, whether you participate in a workplace retirement plan and whether you're talking about a "traditional" or Roth IRA. (The IRS website spells things out in its "Retirement Topics: IRA Contribution Limits" area.)
Keady's survey also found that even when people decide to put money into an IRA, they spend less time on it than they do picking out a restaurant for a special occasion or buying a flat-screen TV or tablet. Of those with IRAs, TIAA-CREF found, 55% spent an hour or less planning for that investment.
But the payoff for putting money away for retirement wisely can last much, much longer than a flat-screen TV you'll replace in a few years.
"You might save $50 by looking at ads and finding a tablet," said Keady. "But if you spend the time to find an IRA with reasonable fees and expenses, instead of one charging more, you could save yourself a lot of money over many years."