For retiree Carol Klonowski, 59, portfolio management has become a 20-hour-a-week job. The former computer systems analyst attends free classes offered by her brokerage firm, Charles Schwab, makes regular stock trades from her computer, and reads up on analyses by financial advisers. She jokes to friends that she manages a small—very small—hedge fund.
Her efforts have paid off. Unlike the portfolios of many of her peers, Klonowski's investments have already recovered from their losses in 2008 and early 2009, partly because she started buying the stocks of large, dividend-paying companies including Johnson & Johnson and Kraft just before their shares came bouncing back.
Klonowski's strategy of managing her own investments is unusual among retirees. Many of her peers turn their money over to professionals or stick with funds designed to automatically become more conservative as they age. Target-date funds have become increasingly popular, with investors pouring $45 billion into them in 2009, according to Morningstar. But advisers say such tools can give retirees and soon-to-be retirees a false sense of security, and that successful investors are usually more involved in the decision-making process.
"I think they're horrible. I don't recommend them at all," says Dean Barber, president of Barber Financial Group in Lenexa, Kan., of target-date funds. He points out that many of these funds lost significant amounts of money in the recent downturn because they weren't invested conservatively enough for baby boomers nearing retirement. Vanguard's Target Retirement 2010 Fund, for example, fell 21 percent in 2008, before largely recovering in 2009. "If I'm a retiree within two years of retirement, would I expect that fund to lose over 20 percent? No way," Barber says. He adds that the expenses of target-date funds tend to be higher than those of index funds, since managers make allocation decisions. Here's what investment advisors recommend instead:
Get regular check-ups. "In the '80s and '90s, when people retired, they'd get an asset allocation developed and then forget about it because everything did so well," says Barber. But in today's volatile market, he says, if people don't regularly rebalance their portfolios, they're at risk for being too heavily weighted in stocks or bonds. If investors have too much money in stocks, they can lose a lot when the market drops. If too much is in bonds, they might not be able to keep up with inflation. Retirees are particularly likely to fall out of balance because they're no longer adding money to their accounts, Barber says. That's why he recommends reviewing retirement investments at least three times a year.
Know what you need. Retirees who want to become more involved in managing their portfolios should first decide how much money they will need to take out of their investments, advises Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City. For example, someone with $1 million in his or her portfolio might plan to withdraw 5 percent a year, or $50,000. (Most people wouldn't want to withdraw a higher percentage than that, he says, because it doesn't leave much wiggle room for dips in the market.) With a 5 percent withdrawal rate, investors will need to put at least some of their money in stocks, because bonds—while safer—provide lower returns. On the other hand, a retiree who needs to withdraw only 2 percent of his portfolio, perhaps because he also receives income from a pension, can rely more heavily on safer bonds and certificates of deposit. "The withdrawal rate you require will tell you how much risk you need to take," says Courtney. Over time, he says, people usually increase the value of their withdrawals to keep pace with inflation.
Seek stability. Even retirees who actively manage their investments will want the bulk of their portfolio in a diverse set of investments that don't require much daily monitoring. "You should be setting up your portfolio in a way so you're not making constant changes," says Courtney. Adjustments and rebalancing, yes, but frequent stock and fund trades, no. "If you're very active in buying and selling asset classes, the odds are against you being able to time those right to make money [consistently]," he adds.