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Retirement-Planner Conundrum: Is It Time To Pull Away From the Market?

With retirements growing longer and the market at an all-time high, are stocks safe for retirees and pre-retirees? Conventional wisdom says that workers should enter retirement with roughly 60 percent bonds and 40 percent stocks, and that the rule of thumb for year-to-year stock allocation is 100 minus a person's age.

Given the circumstances retirees face, however, that isn't always the soundest advice, at least not for conservative clients of modest means. “I take a defensive approach with my clients 100 percent of the time,” said Kyle O'Dell, President of Secure Wealth Strategies. “I like to have as much as we can on the insurance and annuities side.” Whether a client is middle-aged or a few years out from retirement, O'Dell prefers an allocation skewed heavily towards cash-value life insurance, annuities and other principal-protected assets.

On the other hand, reducing the downsides of a stock-heavy portfolio may appeal to more risk-friendly retirees. “People traditionally think about reducing equities and increasing bonds, but I look at it more from a standpoint of reducing the overall volatility of a portfolio,” said Hank Parrott, President of Estate and Financial Strategies. “Having someone stay in the neighborhood of 30 to 40 percent where they can keep growing their incomes for a lifetime makes a lot of sense.”

Still, Parrott and O'Dell both note the importance of providing for one's lifestyle with safer and even lifetime guaranteed assets before worrying about return rates.

“If there was a ten percent chance you'd run out of money, would you be willing to take that chance?”, Parrott said. “Most people don't want any chance of running out during retirement.” Once clients' living expenses are accounted for, though, the rest of their allocations really come down to their risk preferences, priorities and trust in whatever system they or their advisors use to play the market. A poor sequence of returns on those “extra” savings may put a damper on vacation plans and inheritances, but it won't put anyone out on the street.

What may be a more important question, then, is how younger planners should allocate their growing assets, and when and how those allocations should change as they grow older. Middle-aged and millennial workers have decades of investments, returns and market fluctuations ahead of them, and the choices they make today will determine the lifestyles they enjoy and the amounts of money they can afford to risk in retirement.

For more conservative advisors such as O'Dell, the choice is simple: risk as little as possible by allocating as much as possible to principal-protected income streams. To many others, a stock-heavy portfolio is a safe enough option that can produce greater growth during the years clients can afford to ride out an up-and-down market. “In their 40s, it is fine for people to have close to 80 percent of their money in the market,” said Reno Frazzitta, President of Secure My Funds. “You're not going to need that money any time soon, and you can afford to withstand and recover from drops in your investment account.”

While stocks may provide greater growth potential in theory, however, they can still be outperformed. In fact, a 2010 Wharton study showed that from 1995 to 2009, indexed annuities outperformed the S&P 500 67 percent of the time, and a 50/50 mix of the S&P 500 and one-year Treasury Bills 79% of the time. “That's certainly not to say that annuities are always going to beat the market, but the study is one of the things we consider,” said Parrott. “If I'm so risk-averse that the thought of losing any money would keep me up at night, then the best alternatives are life or annuities.”

In such a risk-averse scenario, those conservative clients need to start saving early with carefully chosen products. Parrott said that variable annuities' high growth potential comes with hefty fees, for instance, while cheaper, fixed index annuities still provide solid growth and greater stability. And, even when choosing from a long list of fixed annuities, clients will also also want to rule out those that include growth-limiting interest rate caps. “All in all these criteria reduce you from 1000 or so products down to about 25,” said Parrott.

Finally, most clients who opt to play the market in their 30s and 40s do need to begin pulling away around age 50. “The biggest risk to someone approaching retirement or in retirement is taking a big hit to their assets at a time when they need to start drawing from those assets,” said Frazzitta. While ten to fifteen years of dollar cost averaging within a diverse portfolio might allow a 50-year old to weather a downturn, the chances of recovery grow slimmer each year. “Start at the age of 50, and continually decrease your percentage in the market as you approach retirement,” Frazzitta added. “By the time you retire, you should have at least two thirds of your assets in safe instruments.”

Overall, current market conditions should encourage caution among clients of all ages and risk tolerances. “This is one of the longest bull markets we've ever seen, and we're due for a bear market to say the least,” said Parrott. Market-friendly investors should be wary of an imminent correction and allocate accordingly, and those who purchase indexed annuities and life policies probably can't count on the same growth they've seen over the last few years. Combined with the increasing average length of retirement, the likelihood of a downturn should also spur retirees and their advisors to rethink the oft-recommended four percent rate of withdrawal.

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