How Boomers Can Act Now to Repair Their Nest Egg

Many pre-retirees are recalibrating their expectations.


Reality check. Indeed, boomers accustomed to double-digit returns in good years need to be realistic about the next five years or more. In a slow-growth economy burdened by crushing government debt and potentially higher inflation, some advisers are running models for their currently retired clients based on an average annual return of 4 percent after inflation over the next five years. Harold Evensky, a wealth manager in Coral Gables, Fla., forecasts perhaps 6 percent per year on average over the next decade. He says an allocation of 40 percent bonds and 60 percent stocks is reasonable for investors with little stomach for market gyrations and urges a "core and satellite" strategy for stocks. That means roughly 80 percent invested for the long term in domestic and international index funds or exchange-traded funds, to keep expenses low, leaving 20 percent for riskier shorter-term bets such as emerging market funds or commodities.

To compensate for more muted domestic returns, most people will still want some holdings in emerging economies such as India, Brazil, and especially China, whose economy grew in double digits for the first two quarters of this year, compared to last year. Larry Ginsburg, a financial planner in Oakland, Calif., likes the Matthews Asia Funds as an option for indirect investment in China. As of June 30, Matthews Asian Growth & Income Fund, for example, had a benchmark-beating three-year average annual return of 2.04 percent. It was up 20.50 percent for the year ended June 30.

While many shun gold investments as a bubble waiting to burst, Lyn Dippel, an adviser in Columbia, Md., sees a role for gold as a way to counteract sluggish overall market returns. "You've got to be a little creative," she says, citing SPDR Gold Trust as a good possibility because it holds gold bullion, rather than riskier mining companies. The fund was up 24 percent for the year ended July 31, compared to about 14 percent for the Standard & Poor's 500 index.

Henry "Bud" Hebeler, a Seattle-based personal finance expert, favors defensive steps right now, reasoning that growing U.S. debt is bound to trigger higher inflation. He thinks boomers' bond portfolios should include TIPS (for "Treasury inflation-protected securities") or U.S. Treasury I bonds. I bonds, like traditional savings bonds, pay a set interest rate, but add an extra payment each year to keep pace with the cost of living. Taxes aren't due on interest earned until the bond is redeemed. TIPS pay a fixed interest rate, but the bond's principal is adjusted twice a year according to inflation. Interest earned on TIPS is taxable when paid, so it's best to hold the bonds within an IRA, Hebeler says.

One option for boomers too rattled by volatility to comfortably manage their own diversification is a target-date fund. Such funds automatically reset the distribution of money in stocks, bonds, and cash to a more conservative mix as retirement approaches. Many target-date funds hold other funds managed by the offering firm; Fidelity's Freedom 2020 Fund, for example, held positions in 27 different Fidelity funds as of June 30.

The sales pitch: "The value is the diversification of underlying funds, and the professional manager who changes the asset allocation to make sure the mix is appropriate for your time horizon," says John Sweeney, executive vice president of planning and advisory services at Fidelity Investments. The funds can help prevent investors from fleeing the market during downturns, a common problem that really sabotages results. A study by research firm Dalbar Inc. reveals that for the 20 years ending in December 2009, annualized returns for the S&P 500 index were more than 8 percent, but returns for the average stock investor were just over 3 percent.

Someone who is 55 and wants to retire in 15 years, for example, might invest in a fund targeted for 2025. Vanguard's Target Retirement 2025 Fund, for example, currently has 60 percent of assets in domestic stock funds, 15 percent in international stock funds, and 25 percent in bond funds. At the target date, that breakdown will be more like 40-10-50. The fund, which has lower expenses than its peers, was down more than 5 percent on average for the past three years, but up nearly 14 percent for the year ended June 30.