Market dive means it's retirement crunchtime for boomers

The leading edge of the baby boomers – the postwar generation that led the way on everything from war protests to yuppiedom and two-income families – is about to experience another first: postcrash retirement.

With the first wave of boomers turning 64 this year, they have little time to make up their losses from the recent debacle of stocks and housing. Not since the late 1930s have workers on the cusp of retirement faced such a big one-two punch.

So how are they handling it? Not well. It's almost become a cliché to say most boomers haven't saved enough for retirement. Nearly a quarter of those who turn 50 this year say they haven't even started saving, according to a poll in January. Here's the surprising part: According to some experts, even those who have managed to stash away some savings must be careful not to invest the money too cautiously.

With life spans increasing – and many boomers dreaming of active retirements, among other factors – some advisers suggest that near-retirees keep a sizable holding in stocks. The old adage – subtracting one's age from 100 to get the proper stock allocation – just doesn't apply anymore, this camp believes.

"There's a new view coming along" that recommends "a fairly consistent asset allocation as you grow older, or even an increase in your equities" portion, reports Stephen Brown, finance professor at New York University's Stern School of Business. "Anywhere from 60 percent to 40 percent in equities would be appropriate for all age groups [but not the highly risk-averse], especially the newly retired."

Stock losses averaged 16 percent

But wait! This is postcrash 2010. Boomers lost a chunk of their 401(k) savings – an average 16 percent between the end of 2007 and June 2008, according to Mercer – because they invested in stocks (see fact box). Why should they trust stocks now?

"Sixty percent or more in equities is an exposure to a fair amount of volatility," says Seth Masters, chief investment officer of defined contribution investments at AllianceBernstein in New York. But "it delivers a much higher return. If you're trying to live off your money for 20 to 30 years [in retirement], it's the only way you can be successful."

Such views resonate with Susan Graham of Bellevue, Wash. Retired from Microsoft a decade ago, she maintains a 60-40 stock-to-bond portfolio allocation. She and her financial planner arrived at that allocation because she wants her savings to grow and doesn't need the money now. Currently, she's getting income from Social Security payments, which began last year, and rent from a boarder in her home. To Ms. Graham, "stocks' potential for growth is amazing."

Some boomers have already embraced this message.

Already nearly fully retired, New York attorney Alan Naftalis invests his savings roughly 50 percent in stocks, 50 percent in fixed income. If anything, he could see raising slightly his stock weighting. He soon expects to buy a country home in upstate New York, ideally on a lake. He'll also need to purchase a car and maybe even a small boat. "With the new house, my monthly costs will be going up significantly," says Mr. Naftalis, who trusts stocks to outperform bonds over the long term.

Target-fund investors kept investing, despite crash

Other older boomers may be buying into that view, too, if target-date retirement funds are any indication. Target-date funds typically shift their portfolios gradually from stocks to bonds and other income investments as holders approach and enter retirement. The 2011-15 target-date funds, those most likely to include boomer investors retiring in the next few years, have experienced only one month of net outflows since the stock market's plunge in 2008, according to Morningstar.

Despite the turmoil when many investors were fleeing stocks, older boomers in target-date funds kept putting in money. Last year, net asset inflows totaled only about $431 million less than in 2008, despite the crash, Morningstar data show. The average percentage of stocks held by these funds: 57.3 percent.

One reason for that stability: Target-date funds are increasingly part of 401(k) plans, which helps drive assets into these funds, says David Wray, president of Chicago-based Profit Sharing/401K Council of America. But there's also another factor at play: "The advice being given people approaching retirement is that, no matter what the market's doing now, if they expect to live for an extended period in retirement," they should have some equity holdings, he says.

Of course, people need to "look to their own situation," he adds. When choosing how to invest, they should weigh their own risk tolerance and other factors – and not just embrace a standard rule of thumb.

Also, risk tolerance and "new thinking" can go just so far.

On the advice of her financial planner, Graham largely held to her 60-40 stock-bond allocation through the market's recent debacle. But if stocks seem poised to tumble again, Graham expects she would bail out of stocks and maybe even bonds.

"I'd wait until the market seemed to have bottomed," she says. "Then I'd get back in."