Retirees often believe that moving all their investments into cash and bonds, away from stocks, will safeguard their financial assets from risk. However, experts warn that this approach is misguided.
According to financial specialists, most retirees require a portion of stocks—essential for portfolio growth—to prevent running out of funds during potentially lengthy retirements.
“It’s crucial for retirees to maintain some equity in their portfolios for long-term returns,” asserts David Blanchett, the head of retirement research at PGIM, the investment management branch of Prudential Financial.
Longevity: The Major Financial Risk
Blanchett highlights that longevity risk—the danger of outliving one’s savings—is the most significant financial threat for retirees. According to the Centers for Disease Control and Prevention, average life expectancy has risen from about 68 years in 1950 to 78.4 years as of 2023. Furthermore, the number of centenarians in the U.S. is projected to quadruple in the next 30 years, as per Pew Research Center.
During market fluctuations, retirees may feel that shifting investments out of stocks offers protection against risk. While cash and bonds do tend to be less volatile, shielding investors from immediate market changes, experts caution against overly reducing stock exposure.
While it may seem sensible to decrease stock holdings to minimize risks, doing so excessively can threaten long-term financial stability. Retirees who cut back too much on stock can struggle with inflation and risk depleting their savings too soon. Historically, stocks average around a 10% annual return, outperforming bonds by approximately five percentage points.
“Retirement can extend over three decades or more, meaning that your portfolio must continue to grow to support you,” state certified financial planners Judith Ward and Roger Young from T. Rowe Price.
Optimal Stock Allocation for Retirees
A common guideline for stock allocation suggests investors subtract their age from 110 or 120 to determine the percentage of their portfolio to invest in stocks. For instance, a balanced approach for a 65-year-old might involve allocating around 50% to stocks and 50% to bonds.
Investors in their 60s might consider a stock allocation between 45% to 65%, while those in their 70s may opt for 30% to 50%, with the remainder in bonds and cash as advised by T. Rowe Price.
Individual Considerations for Stock Allocation
It’s essential to recognize that every investor’s situation is unique, with varying degrees of risk tolerance. Retirees with substantial savings or guaranteed income sources may opt for lesser risks because they don’t need significant long-term growth. A retiree who might panic during a market downturn should ideally limit stock holdings to between 50% and 60%.
Key Factors to Monitor
Experts emphasize several important factors for retirees to factor into their financial strategies:
- Diversification: Rather than investing heavily in a few stocks, retirees should consider broad market index funds to ensure diversification.
- Bucketing: It’s crucial for retirees to avoid withdrawing from declining stocks, especially in the early years of retirement, by having separate allocated funds in cash and bonds.
