Retirees face an increasingly important decision regarding their investment approach. Together, they are just beginning to figure out how to find financial security in their golden years.
Widespread recommendations
Experts frequently recommend having stocks in retirement portfolios. They argue that equities can provide better returns and fight the risk of outliving one’s assets. Life expectancy is increasing at an unprecedented pace. Consequently, retirees need to adjust their retirement asset allocation strategy to ensure they don’t outlive their savings.
That’s because, historically, stocks have produced close to a 10% average annual return over the long term. This rate means bonds significantly underperform — bonds typically yield five percentage points lower. This strong long-term track record highlights the fact that equity is the long-term growth engine of an investment portfolio. As retirees plan for potentially lengthy retirements—where lifespans have risen from an average of 68 years in 1950 to 78.4 years in 2023, according to the Centers for Disease Control and Prevention—they need to consider the long-term growth potential that equities offer.
Of these worries, longevity risk is reported as the top and most urgent financial worry for retirees. According to projections from the Pew Research Center, the number of centenarians in the United States could quadruple over the next thirty years. That makes it even more important to grow retirement portfolios enough to keep pace with these increasing life expectancies. Judith Ward and Roger Young, certified financial planners at T. Rowe Price, noted, “Retirement can last up to three decades or more, meaning your portfolio will still need to grow in order to support you.”
Stocks are an excellent way to turbocharge your retirement plan. Before retirees make any rush decisions to do so, they need to assess their personal risk tolerance in the first place. Cash and fixed income typically go through cycles of lower volatility than equities. This is what makes them appealing to people who wish to avoid market risk. For those retirees who might panic during market downturns, financial experts often recommend limiting stock exposure to no more than 50% to 60% of their portfolios.
David Blanchett, head of retirement research for PGIM, emphasizes the importance of equities for long-term stability. “It’s important for retirees to have some equities in their portfolio to increase the long-term returns.” This realist outlook highlights the judgement required to strike a proper balance when creating a diversified portfolio that allows for both growth and security.
A 50/50 split between stocks and bonds is a fair starting assumption for a traditional 65-year-old retiree. As with any investing advice, every investor’s situation is different and a person’s tolerance for volatility should inform their investing strategy. If you can tolerate market risk, you might want to consider a more aggressive strategy. This can free you up to raise your stock allocations.
Those retirees who have deferred enough capital usually adopt a risk averse approach. In doing so, they assume less risk, while safeguarding their financial health. The relative abundance of available options retirees can use to customize their retirement portfolios to best fit their needs and preferences.
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