As retirees plan for their financial future, many may consider shifting their investments away from stocks and towards cash and bonds in an effort to reduce risk. However, experts caution that this strategy may not be as safe as it seems.
According to David Blanchett, head of retirement research for PGIM, retirees need to have some exposure to equities in their investment portfolio in order to achieve long-term growth and avoid the risk of running out of money during a retirement that could last for decades.
The biggest financial risk facing retirees is longevity risk, which refers to the possibility of outliving one’s savings. With life expectancy on the rise, retirees need to ensure that their investment strategy accounts for the possibility of living well into their 90s or even reaching the age of 100.
While cash and bonds may offer stability and protection from market volatility, they may not provide the necessary growth to sustain a retiree’s lifestyle over the long term. Historically, stocks have outperformed bonds by a significant margin, with an average annual return of around 10%.
To determine the appropriate allocation to stocks in a retirement portfolio, one common rule of thumb is to subtract your age from 110 or 120. For example, a 65-year-old retiree may consider a 50/50 allocation to stocks and bonds as a starting point.
However, individual circumstances and risk tolerance should also be taken into account when determining the optimal stock allocation. Retirees who have sufficient guaranteed income sources like pensions or Social Security may be able to afford a more conservative investment approach.
In addition to stock allocation, diversification and bucketing are important considerations for retirees. Diversifying investments across a broad range of assets can help mitigate risk, while bucketing can help retirees weather market downturns by having separate pools of assets to draw from during times of volatility.
Ultimately, retirees should work with a financial advisor to develop a personalized investment strategy that takes into account their individual goals, risk tolerance, and financial situation. By maintaining a balanced portfolio that includes a mix of stocks, bonds, and cash, retirees can increase the likelihood of achieving their long-term financial objectives and enjoying a secure retirement.
