Should Retirees Shift to Stocks?

It's not your grandfather's retirement portfolio anymore.

Conventional wisdom has been that as you near or enter retirement, you should shift most of your portfolio into safer, more conservative fixed-income investments. But for today's retirees, conventional wisdom could backfire.

Baby boomers have started saying goodbye to the workplace at the same time life expectancies for Americans have increased. These new retirees will need more money to ensure their potentially decades-long retirements are as golden as they planned.

"You want to go more conservative, but you also don't want to become so conservative that you're just getting bank rate on your money," says Mark Kennedy, president of Kennedy Wealth Management in Calabasas, Calif.

"In our industry the risk that's most talked about and that is on most people's minds is volatility risk," says Tim Courtney, chief investment officer at Burns Advisory Group in Oklahoma City. "But actually that's a very minor risk. The most important risk is to your wealth. Is your wealth, in terms of purchasing power, being depleted over time?"

And the factor that can dramatically deplete wealth is inflation.

Courtney recommends that older investors consider holding 30% to 40% of their assets in stocks. "They are more volatile," he says, "but they also provide the growth that your portfolio will need to outpace inflation."

As for the traditional bonds many retirees turn to, Courtney says analyses by his firm show that fixed-income assets don't beat inflation a full third of the time. "No matter how you try to diversify your bonds -- government, corporate, long-term -- it doesn't help. The diversification of the bond side doesn't help you beat inflation," says Courtney. "You've got to hold some percentage of stock in a portfolio to hedge inflation."

That's tough advice, though, for investors of any age who have watched the market gyrations of recent years.

"The stock market has bubbles, the housing market has bubbles, in the 1600s the tulip industry had a bubble. So there will be a bond market bubble," says Kennedy. "The problem with the bond market now is that it's been going up steadily in the last 10 years without a hiccup."

Because bond prices go up as interest rates drop, that relatively smooth bond ride will likely end when the Federal Reserve Board decides to raise rates. "The bond market now is about three times the equity market," says Kennedy. "Once the Fed decides to raise interest rates, look out."

Kennedy sees another potential problem with bonds: lack of due diligence by purchasers.

"When you invest in bonds, you're buying a debt; you're the lender to whoever is issuing the bond," he says. "Most people don't check out the corporations or municipalities that issue the bonds. Billions of dollars are put every day into bonds without understanding the underlying credit rating of where they're putting their money."

A financial planner can help older investors work out a plan designed for the preservation and distribution phase of the investor's life, says Kennedy.

From Accumulation to Distribution

Focusing on the distribution phase also is why, Courtney says, older investors can't completely do away with equities.

"If you're withdrawing 4% to 5% of your portfolio (annually) to live on, that might warrant even more stocks to keep generating growth," he says. "The market is expecting inflation of 2% over next few years, but Treasury bonds aren't giving you enough yield to keep pace with that.

"It is a balancing act -- kind of an art -- and people's comfort does come into play," Courtney says. "People can feel comfortable about holding all their money in bank CDs, but all their money is being eaten away. They're going broke slowly."