Baby boomers’ enduring love affair with stocks is well documented, but their faith in the market might be setting them up for retirement failure.
A study from Fidelity found that many retirees are investing like 30-year-olds, with nearly four in 10 adults between 65 and 69 holding at least two-thirds of their portfolios in stocks instead of reallocating to safer bets like bonds. According to the Wall Street Journal, one in five 85-year-olds with taxable brokerage accounts at Vanguard keep nearly all their money in stocks.
Late-life reallocation away from stocks became the retirement planning gold standard for a reason. Here are the risks older investors run by betting so heavily on stocks.
The young can invest aggressively because they have time to recover from losses. Older investors don’t have that luxury, because every stock market crash happens on the day that someone is set to retire.
You don’t want that someone to be you.
“One of the primary risks of being heavily allocated to stocks at an advanced age is something called the sequence of returns risk,” said Thomas Maluck, an NFEC-certified financial education instructor and international keynote speaker in Columbia, South Carolina.
The concept deals with the possibility of enduring a market downturn in the crucial months on either side of your last day of work.
“The probability of retirement savings lasting a lifetime is reduced when stock losses occur in the years just before or after retirement,” said accredited financial counselor Camille Gaines, founder of Retire Certain.
Selling during a downturn magnifies losses, because you have to sell more shares to pull out the same amount of cash. “Each withdrawal will reduce current and future returns for the portfolio,” said Maluck.
It’s not unreasonable to hold two-thirds of your money in stocks no matter your age or proximity to retirement, provided you can survive an extended downturn with the one-third invested in non-equity assets — but knowing is the key.
“Many investors don’t realize how much risk they have from owning stocks, so the first step is awareness,” said Gaines.
Gaines suggests older investors evaluate their risk by multiplying the percentage decline of past bear markets — Hartford Funds says the average is a loss of 35% — and multiplying that by the amount they have invested in stocks.
“An average of past bear market declines or a more extreme percentage can be used for this risk estimation,” she said. “Then investors can decide if the amount of risk exposure they have from stocks is too much and adjust accordingly if it is.”
The analysis only works if you know how much you’ll need to get by without touching your stocks while the market recovers.
“Planning one’s budget and identifying the minimum expenditures per month is useful for minimizing withdrawals as much as possible during a downturn,” said Maluck.
If Stocks Are Too Risky, Where Should You Put Your Money?
Many investors stick with the traditional hedge against late-stage stock volatility.
“An enduring strategy for many has been a gradual shift towards fixed-income assets such as bonds or Treasury notes,” said Tim Schmidt, founder of IRA Investing. “These financial instruments typically exhibit more stability than stocks, making them an attractive option for capital preservation and regular income generation.”
But investors should keep in mind that bonds are not without risk, and they, too, depend heavily on market timing and unpredictable macroeconomic forces.
“Bond values with fixed interest rates decrease when interest rates rise,” said Gaines. “Most bonds are not good investments during rising inflation because real, after-inflation bond yields can be negative. There have also been periods of time when stocks and bonds decreased in value at the same time, thereby making bonds unsuitable as a defensive asset.”
Certificates of deposit are even more secure — and you can stagger their maturity dates to ensure a steady flow of money.
“A CD ladder can be drawn upon when a retiree needs cash but would take too large a hit withdrawing from their stock portfolio,” said Maluck.
Kami Adams, a retirement income specialist at Creative Legacy Group, suggests a different time-tested favorite.
“Another avenue worth exploring is annuities, which offer a guaranteed income stream in retirement,” she said.
But in an era where 5% yields are there for the taking, the best bet might be the rock-solid security of an old-fashioned FDIC-insured savings account.
An alternative philosophy says that today’s extended retirements make it safer to leave your money in stocks even at the risk of hitting a downturn just as you’re set to retire.
“Having 60% or more of your portfolio in stocks in your 60s isn’t a bad idea at all,” said Cameron Valadez, CFP, CPFA, AWMA and partner at Planable Wealth, a California-based financial planning firm focusing on retirement and inheritance planning for adults over 50.
The idea is that by selling their stocks to avoid a bear market, the average of which lasts less than 300 days, they’re abandoning their most reliable means for continued wealth generation in retirement, the average of which lasts for two decades.
“For the last 100 years, stocks are one of the only asset classes that have historically returned around 7% net of inflation. If an investor in their 60s wants to preserve their purchasing power and grow their wealth over the next 20 to 30 years, they must maintain an allocation primarily in equities. If you don’t participate in the stock market at the onset of retirement, you run the real risk of running out of money prematurely, and you will be forced to allocate to equities later.”
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