There's good news for Baby Boomers: As a generation, they're generally on track with their equity holdings in terms of retirement, according to Wells Fargo Investment Institute research. But there's a caveat. Many Boomers are currently holding a higher-than-recommended percentage of their portfolios as cash.
Consider dividend-paying stocks
Not long ago, it was common for investors close to and in retirement, who relied on their portfolios for income, to increase their exposure to fixed-income asset classes. This exposure was intended to reduce volatility and boost income generation, says Michael Taylor, CFA, Vice President – Investment Strategy Analyst at Wells Fargo Investment Institute.
But since the financial crisis a decade ago, the trend has been toward higher allocations to cash. "People have become more cautious, and they're sitting on the sidelines," Taylor says. "That's a phrase that we've been using quite a bit."
He suggests that it's time for these cautious investors to speak with their investment professional regarding if they should consider returning to more diversified allocations for potential income and risk management, in addition to the appropriate mix of stocks and bonds. Baby Boomers overall have adequate equity exposure, yet they may want to talk with their advisor to see if adding stocks that have historically paid dividends may be appropriate for their circumstances. "That can help add some income because many stocks that we would consider blue-chip stocks offer the potential for dividends,"* Taylor says. "The price of the stock might fluctuate over time, but dividends have usually stayed pretty steady, so that also has potential to add to your income."
"As people are living longer, the risk of outliving a retirement nest egg is growing. Many Baby Boomers are now asking themselves how to make their savings last for an extended retirement." — Michael Taylor, CFA, Vice President – Investment Strategy Analyst, Wells Fargo Investment Institute
Holding stocks may offer an additional benefit: Stock values tend to increase as the cost of goods increases. "We haven't really seen much inflation since the crisis, but eventually we will likely see prices start to rise," Taylor says. "Stocks should stay ahead of that, so that may help offset inflation risk. If you're just sitting on cash and prices start to rise, that cash erodes in value."
Plan around possible retirement scenarios
The optimal proportion of cash to fixed income varies from investor to investor and depends on multiple factors, including risk tolerance, time horizon, and liquidity needs.
"How much cash do you need to meet regular expenses? If you're planning to make purchases in the near future — six to 12 months — you want to make sure you have cash available to do that," Taylor says. "If you don't, you may find yourself selling stocks at an inopportune time, when prices are low and you end up losing money. This is really a question that your investment strategist or financial advisor can work through with you."
He also recommends that clients have questions ready for their advisors, such as:
- What income sources will I use to fund my retirement?
- Should I work part time, even after I retire?
- What are the risks involved in pursuing retirement income needs?
- Should I adjust my portfolio in seeking to generate more income?
- How much can I realistically withdraw from my portfolio each year?
The discussion should run through different retirement scenarios. "Talk about what retirement would look [like] at 62, 65, and 70," Taylor says. "That should include what your Social Security benefits are likely to be and other sorts of benefits you're likely to have, such as pensions. We believe doing a scenario analysis is really the best way to do that."
An advisor can help diversify your portfolio, understand your income needs, and work through potential retirement scenarios — the keys to making sound decisions about your cash allocation.
"Be informed and know what you're heading into," says Taylor. "As people are living longer, the risk of outliving a retirement nest egg is growing. Many Baby Boomers are now asking themselves how to make their savings last for an extended retirement."
*Dividends are not guaranteed and are subject to change or elimination