There is a disconnect between financial advisers and GenXers. Financial advisers agree about how to save for retirement: start young, and invest automatically and regularly. Financial advisers also generally recommend that people now in their 30s and early 40s have at least 70% of their retirement portfolios in stocks. But the GenXers have just 48% of their 401(k) money in stocks as of the end of 2009, according to a Smart Money article by Jilian Mincer entitled “What’s Gen X So Scared Of? Stocks.”
“They’re much more risk-averse than they ought to be for their age,” John T. Gugle, a financial adviser with Alpha Financial Advisors in Charlotte, N.C., who says about half of his 100 clients are Gen Xers, was quoted as saying.
Gen Xers have experienced more busts (the tech bubble, the lost decade, the flash crash) than their boomer parents, who saw 27-year bull market from 1982 to 1999.
Financial advisers argue that Generation X is slipping further behind on saving for retirement at a time when corporate pension plans are disappearing, health care costs are rising and the future of Social Security is in doubt.
A course correction is needed, advisers say: Gen Xers should max out their 401(k)s and increase their stock holdings, according to Stuart Ritter, a T. Rowe Price financial adviser. Target retirement funds can provide a useful guidepost for this age group: On average, funds with a target date of 2045 currently have 89% in equities, while funds with a target date of 2040 have 87% in stocks, according to the article, citing Morningstar.
Inflation is the danger. “The biggest threat to GenXers to being able to buy the things they will want in retirement is inflation,” Mr. Ritter was quoted as saying, adding: “And historically the asset class that best keeps up with inflation is equities.”
Disregarding the fact that risk tolerance ? like pain ? is subjective, objectively speaking, risk tolerance should be all about time horizon. The longer one has before retirement, the more he or she is able to recover from the inevitable busts, and the greater the exposure to stocks should be.