Investment risks

JIM Dundee's business is doing well - he's an optician and owns his own retail optical store near Tampa, Florida. But Dundee started to get nervous about the economy and stock market a couple of months ago.

"Even though business has been great here, you could just tell by listening to customers. We serve a pretty savvy clientele, and they were all saying something was brewing and that stocks would take a hit."

Dundee, who is 57, decided to reduce the exposure to stocks in his retirement portfolio. Working with his broker at Raymond James, he cut equities from 70% to 50%, with another 35% in cash; the remainder is in bonds and gold.

He hopes to be "semi-retired" by 62 by scaling back time spent on his business. "I'm asking myself, how little risk can I get away with?"

Dundee is hardly alone. The percentage of US households willing to take "above-average or substantial risk" to meet their financial goals has plunged among all groups, according to to survey data from the Investment Company Institute.

The decline has been sharp across all age groups, but is especially dramatic among older baby boomers.

And the market's recent volatility has put new focus on a key question older investors have been asking themselves since the 2008 crash: what is the correct retirement portfolio equity exposure for investors close to retirement, or who are retired already?

Ask the experts, and you'll get answers that are all over the map. The Putnam Institute recently surveyed target date funds and found that retirement data equity allocations ranged from 65% to just 35%. And Putnam's own experts concluded that retirees should have no more than 25% of their money in stocks.

Meanwhile, T Rowe Price advises retirees at age 65 to keep 55% of their money in equities, 35% in bonds and 10% in cash.

So, how much stock should older investors hold? The correct answer, in my view: as little as possible while maintaining high confidence that you can meet your retirement goals.

Start by crafting a serious retirement plan that includes a credible estimate of spending needs, balanced against income you can count on from Social Security, pensions and the like; then, back into a portfolio equity allocation that provides enough growth to fill in the gaps but exposes you to as little risk as possible.

For many, the tough part is coming to terms with longevity risk - the fact that a retirement date is the starting point for a period that might last 30 years or more.

Face the fact of longevity risk

"Your framework for thinking about this should be long-term," says Stuart Ritter, a financial planner at T Rowe Price. "You need to balance two risks - short-term volatility against long-term risk that inflation will erode your assets."

Retirement investors who haven't made a plan are most likely to react emotionally to market volatility. But an informal survey of financial planners - the pros working with people who do have a plan - suggests that the market's recent volatility hasn't panicked most retirees and near-retirees.

"Our clients who just made the jump into retirement are somewhat uneasy and disappointed, but no one is running for the hills yet," says Chip Workman, a registered investment adviser based in Cincinnati, Ohio.

Workman says most of his clients near retirement have anywhere from 40% to 60% of their portfolios in equities.

"We always try to focus on their specific tolerance for risk and their goals, and find the magic area in between how much risk they can tolerate to meet their goals," he says. "We also try to get them to re-focus on the idea that it's not about decisions you make today at retirement, but what might be a 30-year retirement.

"We get them to reflect on everything that has happened in the world and the markets over their lifetimes, and see that they're likely to experience these things again."

Rick Kahler, a registered investment adviser in Rapid City, South Dakota, says that about 80% of his clients have hung on through the roller coaster ride of the last few years. The only ones who are really panicking now, he says, are a relatively small number who "did some selling" at the bottom in 2008.

"They're more anxious than during the last crash," he says. "This time, these folks aren't going to just 'lighten up' on equities like last time - they want to make a 100% jump out of stocks," with a high probability of hurting themselves even more than they did last time.

"These are the clients who have the worst three- and and five-year returns of any of our clients and have suffered most. They were unable to process and resolve the fear that caused the 'acting out' last time and are on the edge of making the same mistake again."

On the flip side are investors able to live mainly from guaranteed sources of income. For them, whatever income they make in the market is icing on the cake.

Such is the case for Art Goldschmidt, 73, a retired professor in State College, Pennsylvania.

Goldschmidt and his wife both receive Social Security, and he has a defined-benefit pension. He also has several IRA accounts invested 70% in equities.

"For me, this is the substitute for Las Vegas," Goldschmidt says. "My father used to say 'it's not real money'."