For Gen X investors, dotcom bubble haunts near-retirement portfolios  

While baby boomers get most of the attention in conversations about retirement, Gen Xers are marching toward the same goal, and in many cases, without the significant financial advantages of the previous generation. Retiring at 55 in America is a relic of the past, funded mostly by a defined benefit pension plan. Now, most people in the 50-55 age bracket are still looking 10 to 15 working years ahead. This extends the years they continue to contribute to 401(k) plans and IRAs to grow their wealth, and time in the market is the biggest long-term advantage investors have. But as an individual approaches retirement, an untimely market crash can seriously set them back.

Generation Only 14% of Gen X workers have a traditional retirement, while 56% of Boomers have a traditional retirement, according to research from the Alliance’s Retirement Income Institute. When examined by generation, Generation X is the generation least financially prepared for retirement in almost every respect. “While baby boomers dominate the headlines, Generation X faces an even bigger retirement crisis,” the authors wrote.

This may push Generation X to watch their retirement fund cautiously. A decade of strong returns has left many investors, especially those a few years away from retirement, heavily burdened. S&P 500 Mutual funds and ETFs continue record stock market gains right into retirement. But history is full of examples of accidents happening at the worst possible moment for unlucky people.

The Amazon dotcom bubble stock chart is a good example. Investors who bought at the dot-com peak in 1999 had to wait a full decade for the stock to reach its previous high and finally reach new records in late 2009. The broader S&P 500 tells a similar story of the slow road to recovery. After hitting bottom in October 2002 following the dotcom crash, it took nearly five years for the index to climb to a new peak in 2007; That peak didn’t even hold as the Great Recession wiped it out almost immediately. From the trough of the second crash in March 2009, it took another four years for the S&P 500 to fully clear its former 2007 peak in March 2013.

Depending on how you count, that means between four and thirteen years of submersion; It all depends on which crash and which pothole you’re measuring from. And for someone three to five years out of retirement, that’s not an academic timeline.

What goes down will ultimately go up, but that’s important for retirees, says certified financial planner Ernie Cave, founder of Cave Wealth Management. “History shows markets recover, but retirees can’t decide whether that recovery will last a year or several years. If you have to sell your investments while depressed to generate income, those stocks are lost forever and can no longer participate in the recovery,” Cave said. This is why what financial advisors call “return sequence” risk is so dangerous.

How to gradually move away from the S&P 500?

For starters, investors currently considering retirement should avoid being overwhelmed by the S&P 500’s gains and how well it’s done for them.

“One of the biggest mistakes I see is that investors approach retirement by keeping almost all of their assets in an S&P 500 fund just because it has performed well over the last decade,” Cave said. He added that the S&P 500 is an excellent long-term investment, but it may not be the right place for the money you’ll need in the first few years of your retirement.

“The problem is not owning an S&P 500 fund. The problem is asking that same fund to pay next year’s bills and fund retirement 25 years from now,” Cave said.

He advocates directing retirees to a diversified “war chest.”

“We want approximately two years of expected portfolio allocations, generally hedged by cash or very short-term investments, with approximately five years of expected withdrawals covered by cash, Treasuries, CDs and high-quality bonds. The remaining long-term assets can remain invested for growth,” Cave said.

The purpose of the retirement war fund isn’t to melt stocks or offset market declines, according to Cave. “This is to reduce the likelihood of a retiree having to sell long-term investments,” he said.

Investors approaching retirement don’t need to have much less exposure to stocks, but there does need to be a clearer distinction between money they will spend soon and money that can be invested in the next market cycle. “Retirement doesn’t eliminate the need for growth. It changes what dollars can afford to expect it,” Cave said.

Some members of Generation X are hurtling toward retirement — literally — and we hope this limits their exposure to market fluctuations. The glide path is when the portfolio gradually shifts away from stocks and toward bonds as an investor approaches and moves toward retirement, reducing the risk of a market downturn just when it would do the most damage.

“As the client approaches retirement, the glide path gradually changes the portfolio,” said Elias Friedman, CFP and founder of Kadima Wealth.

Set up a temporary vineyard tent

Another shield against a crashing market is the bond tent, a strategy for temporarily increasing bond holdings in the years immediately before and after retirement; This is the highest risk window for a market downturn.

“Both options can reduce the chance of having to sell stock after a big drop in the stock market. In my experience, clients are more accustomed to a rolling stock approach when investing,” Friedman said.

Unraveling the bond tent is not about waiting for a signal that the danger is over, Friedman said, since no one can reliably pinpoint that moment and trying to do so is essentially just market timing by another name.

“The client has many options for how to deal with this risk. For example, consider a bond or CD ladder or short- to medium-term securities. You don’t have to put all of your money back into the market at once,” Friedman said. “Smart clients will do this tactically, with occasional portfolio rebalancing. This helps mitigate some of the risks.”

Whatever the path, Friedman says any transition should be gradual rather than a major reallocation change in retirement. “Think of it like off-roading on the highway and then hitting the brakes. I’ve found that gradually slowing down makes driving less stressful and more comfortable,” he said.

But Asher Rogovy, chief investment officer of Magnifina, a registered investment advisor, says this market is different from markets of the past in at least one key way: artificial intelligence and the growing importance of a handful of technology stocks in the S&P 500.

“Traditionally, 20 to 30 individual stocks provided adequate protection against company-specific risk. Today, an estimated 40% to 50% of the S&P 500’s market capitalization is in companies tied to a single theme: artificial intelligence,” Rogovy said. he said.

If the past is a beginning, that could mean it won’t end well, Rogovy said. “We’ve seen this story before. The dot-com bubble involved similar levels of index concentration, and its aftermath should give us pause,” he said. “Concentration risk is inherent in cap-weighted indexes. In particular, investing an equal amount in each S&P 500 company could have prevented much of the decline and reached new highs years earlier,” Rogovy said. S&P created an equal-weighted version of the index in 2003, and there are now many funds and ETFs that offer the option of equal-weighting underlying S&P 500 exposure.

But Rogovy doesn’t think there’s any pure stock strategy that can completely survive a market crash, so he says the most important decision for anyone approaching retirement is the split between stocks and bonds. “Because most people know stocks much better than bonds, that’s where an investment advisor can be invaluable. By combining bond allocation with disciplined rebalancing and value investing, an advisor can create a portfolio that can withstand fluctuations to protect the client’s retirement,” he said.

Mike Dunlop, co-founder and CFP of Ignite Planning in Cedar Falls, Iowa, said the biggest danger for Gen “Seven of these now account for more than 30% of the entire incident. The real danger for someone aged 50 to 55 is not an accident but an accident at the wrong time or the risk of a flashback,” Dunlop said.

“If the market drops 30% the year you retire and you’re taking out money to get by that year, you’re selling at the bottom to buy food and gas, and that pile never has a chance to recover,” he said. “Someone close to retirement doesn’t have a lost decade to give up,” he added.

The fee-only financial planning firm removes a portion of client assets from underlying S&P 500 funds or total stock market index funds and reallocates them to large value — “the same stock market, but we’re not betting the entire retirement on the top seven names,” Dunlop said.