For Gen X investors, dotcom bubble haunts stock market portfolios closing in on retirement

While baby boomers hog most of the attention in conversations about retirement , Gen Xers are marching toward the same destination, and in many cases, without key financial benefits of the former generation. Retiring by 55 in America is mostly a relic of the defined benefit pension plan-funded past. Now, most people in the 50-55 range are still looking at 10 to 15 working years ahead. That extends the years during which they are continuing to contribute to 401(k) plans and IRAs to grow their wealth, and time in the market is the greatest long-term advantage investors have. But the closer an individual gets to retirement, the more an ill-timed market crash can seriously set them back.

Gen X is the age group — roughly defined as those born between 1965 and 1980 — heavily impacted by the shift from defined benefit to defined contribution pensions, as workplace pensions became less common. Only 14% of Gen X workers have a traditional pension, compared with 56% of boomers, according to research from Alliance's Retirement Income Institute. When broken down by generation, Gen Xers are the least financially prepared generation for retirement by nearly every measure. "While baby boomers dominate the headlines, Generation X faces an even greater retirement crisis," the authors wrote.

The situation can leave a Gen Xer to watch their retirement fund warily. A decade of strong returns has placed many investors, particularly those a few years out from retiring, heavily weighted in S&P 500 mutual funds and ETFs, riding the record stock market gains right up to the cusp of retirement. But history is littered with instances of crashes that, for the unlucky, happen at the worst possible moment.

The Amazon dotcom bubble stock chart is a good example. Investors who bought at its 1999 dot-com peak had to wait a full decade before the stock reclaimed that old high, finally breaking through to new records in late 2009. The broader S&P 500 tells a similar slow-road-to-recovery story . After bottoming out in October 2002 following the dot-com bust, the index took nearly five years to climb back to a new high in 2007 — a high that didn't even hold, as the Great Recession erased it almost immediately. Measured from the bottom of that second crash, in March 2009, it took another four years before the S&P 500 finally cleared its old 2007 peak for good, in March 2013.

Depending on how you count it, that's anywhere from four to thirteen years of being underwater, all depending on which crash and which trough you're measuring from. And for someone three to five years from retirement, that's not an academic timeline.

Certified financial planner Ernie Cave, founder of Cave Wealth Management, says that what goes down will ultimately go up, but when matters to retirees. "History shows that markets recover, but retirees don't get to choose whether that recovery takes one year or several. If you're forced to sell investments while they're depressed to generate income, those shares are gone forever and can no longer participate in the recovery," Cave said. This is why what financial advisors call the "sequence-of-returns" risk is so dangerous.

For starers, investors who are already thinking about retirement should avoid being starstruck by the S&P 500's gains and how well it has done for them.

"One of the biggest mistakes I see is investors approaching retirement with nearly all of their assets in an S&P 500 fund simply because it has performed well over the last decade," Cave said. The S&P 500 is an excellent long-term investment, but it might not be the right place for money you'll need during the first several years of retirement, he added.

"The problem isn't owning an S&P 500 fund. The problem is asking the same fund to pay next year's bills and fund retirement 25 years from now," Cave said.

He advocates steering retirees toward a diversified "war chest."

"We typically want approximately two years of expected portfolio distributions protected in cash or very short-term investments , with roughly five years of anticipated withdrawals covered by cash, treasuries, CDs and high-quality bonds. The remaining long-term assets can stay invested for growth," Cave said.

The purpose of a retirement war chest, according to Cave, isn't to shed equities or eliminate market declines. "It's to reduce the chance that a retiree is forced to sell long-term investments during one," he said.

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Investors nearing retirement don't necessarily need dramatically less exposure to stocks, but they do need a clearer separation between money they'll spend soon and money that can remain invested through the next market cycle. "Retirement doesn't eliminate the need for growth. It changes which dollars can afford to wait for it," Cave said.

Some Gen Xers are on a glide path to retirement — literally — and that hopefully has limited their exposure to market volatility. A glide path is the gradual shift of a portfolio from stocks toward bonds as an investor approaches and moves through retirement, reducing exposure to a market downturn right when it would hurt most.

"A glide path gradually changes the portfolio as a client gets closer to retirement," said Elias Friedman, a CFP and founder at Kadima Wealth.

Another shield against a crashing market is a bond tent, a strategy of temporarily increasing bond holdings in the years just before and after retirement — the highest-risk window for a market downturn.

"Both options can reduce the chance of having to sell stocks after a major stock market decline. From my experience, clients are more accustomed to a glide path approach to investing," Friedman said.

Unwinding a bond tent isn't about waiting for some signal that the danger has passed, Friedman said — no one can reliably call that moment, and trying to is really just market timing by another name.

"The client has many options regarding how to handle this risk. For ex...

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