If you’re worried about your retirement portfolio right now, I don’t blame you. The stock market got off to its worst start ever during the first few weeks of this year, and then there was the Brexit market turmoil.
These dramatic downturns can be particularly unnerving for boomers in their 50s and 60s, because that’s a time when investors tend to be more concerned with capital preservation than with capital accumulation. Their thinking typically holds that since they’ve approached the end of their working life, it’s time to move away from growing their 401(k) or IRA and towards protecting it.
But for many, that kind of move into a more defensive investing strategy could be far more damaging than any short-term stock market volatility.
That’s because investors typically underestimate how much money they’ll need in retirement. And, in fact, their biggest risk isn’t losing money because of market declines, but running out of money altogether.
Investors should continue to allocate a good chunk of their portfolio toward stocks because retirees wind up living longer and spending more than they expect.
Living Longer Creates Savings Shortfalls
Let’s look at the good news first, and acknowledge the miracle of modern medicine that has extended American life expectancies dramatically.
According to the National Institute on Aging, a 65-year-old woman today will live 20 more years on average — and the healthiest and luckiest Americans are living well into their 90s. That’s great news for all the future great-grandpas and great-grandmas out there, and something to be celebrated.
But living a very long time demands a very large amount of savings.
Sadly, most boomers don’t have that kind of cash.
A BlackRock report released late last year showed that the average retirement portfolio of Americans age 55 to 65 has just $136,200, which will produce a meager $9,100 or so in annual income. Obviously that’s better than nothing, but it’s hardly a comfortable retirement budget.
And even those who are better prepared than their peers may still be much further behind than they think they are. According to a survey by the American Institute of Certified Public Accountants, financial planners reported that 57 percent of their clients are underestimating their retirement expenses.
Given all this, the math often doesn’t support a defensive strategy in low-growth investments for most 50- or 60-somethings.
Instead, these investors should continue to allocate a good chunk of their portfolios toward stocks to gather more wealth because invariably, retirees wind up living longer and spending more than they expect.
Market Downturns Are Not Permanent
Many risk-averse boomers get nervous at this kind of talk, pointing to the stock market crashes of 2000-02 and 2008-09 as proof positive that they can’t afford to invest heavily in stocks.
However, if anything, 2008 is proof positive that stocks have a place even in the portfolios of older Americans.
After all, the ugly 34 percent crash in the Dow Jones Industrial Average that year wasn’t permanent. Even accounting for the rocky start to 2016, stocks are up more than 29 percent from their previous peak back in October 2007 before the sinister bear market caused by the financial crisis.
So even an investor with 100 percent of his funds allocated toward stocks has likely managed to claw back all of his losses — and then some — over the last eight years or so.
Of course, that presumes he was patient and didn’t sell out of panic during the downturn.
You see, the biggest risk to most investors, in truth, isn’t owning stocks, but selling them at an inopportune time. Data across almost 100 years shows that it is exceedingly rare for the stock market to post a loss across 10-year periods and that downturns are usually short-lived. Furthermore, there has never been a period of 20 consecutive years where the stock market has posted a negative return.
In other words, buy-and-hold pretty much always works… if you let it.
Focusing on the long term is admittedly a challenge given the 24-hour news cycle and the constant urge to check account balances online. But if you’re going to live into your 80s, a little stock market volatility in your 50s is no reason to panic.
The Right Stock Allocation Is ‘More’
For all these reasons, financial experts are increasingly recommending higher stock allocations for older Americans.
As former AllianceBernstein economist David A. Levine wrote recently in The New York Times, “the mere act of retiring should not prompt any change in your exposure to the financial asset — common stock — that is almost certain to produce the highest returns over the long run.”
Or put bluntly: It is infinitely better to die with money left over, which your heirs can inherit, then to live with no money, which will require your heirs (or charity or the government) to support you.
Investors seem to be catching on, given that they are showing a greater bias toward stocks in their portfolios. Recent data from mutual fund giant Vanguard shows that the typical customer with a traditional IRA there is almost 60 percent in stocks even at age 75. Elsewhere, 401(k) data compiled by The Wall Street Journal in 2014 showed that one in three investors in their 60s had an allocation of 60 percent or more in stocks; one in five had more than 80 percent in stocks.
But while it’s safe to say a bias toward stocks is prudent for many older Americans, determining the precise allocation of stocks, bonds and other assets isn’t so cut and dry.
Your personal financial circumstances play a large role in your investment strategy, including both your current nest egg and your future plans. Your personal risk tolerance is also worth taking into account, since it does no good to be heavily invested in stocks if you will give yourself an ulcer worrying over every move the market makes. Of course, any allocation you settle upon now will be subject to change in the future.
There is no universal answer for the “right” amount of stocks for your portfolio. That decision is between you, your family and — if you have one — your financial adviser.
But generally speaking, if Americans are living longer and the stock market is almost certain to march higher in the long term, it seems a no-brainer to err on the side of more stocks in your portfolio rather than less. That’s particularly true for investors in their 50s and 60s who simply don’t have enough savings yet, and need to focus on growth to achieve the retirement they desire.