Asset Allocation in Retirement ERIN ARVEDLUND There are plenty of myths surrounding retirement.

Lets examine one of the biggies. MYTH: Take your age and subtract it from 100: the remaining amount is how much you should have invested in stocks. FACT: Americans are living so much longer, in some cases well into their 80s, so that old axiom just doesnt work anymore. Now that weve cleared that up, how should you allocate between stocks, bonds, and alternatives if you are 5, 10 or 15 years from retirement? That asset allocation depends not on when you are retiring but on how long you expect to live, say local advisors. And Americans are living so much longer than they or their financial planners expected, that among the chief worries now is outliving assets. Living Longer, Falling Short The bonus of all of us living longer is tempered by whether we will have the retirement assets to live comfortably for another 25 years. A recent 2013 Merrill Lynch retirement study ranked top concerns among retirees as the following: serious health problems, being a burden on ones family, and outliving assets (72 percent, 60 percent, and 47 percent, respectively) with far more women than men citing running out of money as their top concern (61 percent and 47 percent, respectively). Its a misconception that you should target your asset allocation to your retirement age, says Paul Emata, director of investments at PNC Wealth Management in Wilmington, Del. Many any investors look at these target-date funds, and think theyre all set. But you need a diversified portfolio for as long as you live. If you make it to 65 or 70 your chances of making it to 85 or 90 are much greater. Since we all are healthier than pour predecessors the biggest risk is running out of money. Still, he adds, its important to have a plan by setting goals along a timeline and allocating funds accordingly. One bucket of money can be set aside for the first 5-10 years of retirement, to live on, then another portfolio for the following 10-20 years, and so on. Forget about 65 being the target date and plan to have enough for the phases that come after. For high-net-worth clients on the younger side, PNC generally models a fairly high allocation to equities, 60%-70%, about 20% in alternatives that arent correlated to

the stock market (commodities, hedge funds, real return funds and inflation protected securities) and a small amount in fixed income. For those closer to, or at retirement age, but still wanting a growth bias in their portfolio, the PNC model is around 50% equities, assuming 15% also invested in non-correlated alternatives. For retail investors meaning ordinary folks get exposure to alternatives in exchange-traded funds, or ETFs; there are also new mutual funds trading alternatives like managed futures, Emata says. Dont Turn On Auto Pilot Its a bad idea to put all your money in fixed income just because you turned 65, agrees Binney Wietlisbach, president of Haverford Trust. Thats particularly true now because the bond market is no longer yielding the types of returns of even a few years ago. Stocks are much more attractive than bonds, and a younger investor in their 30s, say, should put as much as they can in stocks in their retirement accounts as those are truly long term and appreciate in a tax-deferred account like a 401(k) or an IRA. However, saving for a house, a wedding or children should be done in nonretirement accounts, she says. Thats a different matter. And some retirees want to continue investing in stocks even until theyre well into old age, she says. A client in her mid-50s became a widow many years ago, when interest rates were very high on fixed income. She had a 60% stocks / 40% bonds allocation. She lived until she was 91 and died in 2000. Her stocks went from 50% to 96% of her portfolio at the time of her death, and she wanted it that way. Finally, Wietlisbach recently met with clients, a couple building a house, and encouraged them to take some gains from the stock market to pay for the home. Their allocation was 70% stocks / 30% bonds and with the sale, had moved up to 80% stocks. The clients are aged 72 and 70. Income, From Either Stocks or Bonds Michael Galantino, managing director of the Private Client Group at Boenning & Scattergood in Conshohocken says the popular target-date retirement funds are more a marketing thing than financial planning. These target dates dont make sense, especially with longer life expectancies meaning you might outlive that.

For average clients, Boenning & Scattergood suggests clients own 65% equities, 20% fixed and 10% cash. But every client is different. I have a 25 year old who wont own bonds. Yes, time is his friend, because he has more time to invest in the stock market and weather potential corrections. Galantino, age 50, personally prefers income from stocks over bonds, for instance, Johnson & Johnson ten-year corporate bonds yield 3.4%, but the common stock yields a dividend of 3.1%. In addition, however, he sells options call options on Johnson & Johnson (JNJ) shares for extra income of about 2% a year, for a total return of 5% annually. About 95% of his personal holdings are in stocks. His advice is to lower volatility in a portfolio as a client gets older, rather than just shifting allocations into bonds. Its an old wives tale that bonds dont have volatility. Bonds are very volatile. Moreover, corporate bonds like Apples popular offering are yielding just 3%. Youre going to lose money if interest rates and inflation rise. In addition, Galantino says, he will invest less aggressively if a client has a smaller amount of assets and is less diversified. A 65-year-old with a $2 million stock portfolio and a $2 bond portfolio in municipals, with two properties and his wifes pension can be more aggressive. If he has $500,000 Im more conservative. --enditall