Many retirees believe that shifting their investments entirely to cash and bonds safeguards their retirement savings. However, this strategy could significantly increase the risk of outliving their funds, especially considering that retirement can span several decades. Experts emphasize the crucial role of stocks – the primary driver of portfolio growth – in ensuring financial security throughout a potentially long retirement.
David Blanchett, head of retirement research at PGIM, highlights longevity risk as the most significant financial threat for retirees. The average lifespan has notably increased, and the number of centenarians is projected to quadruple in the coming decades. While shifting away from stocks, particularly during market volatility, might seem to lessen short-term risk, it ultimately compromises long-term growth potential.
While cash and bonds offer stability and protection against short-term market fluctuations, relying solely on them can hinder a retiree’s ability to keep pace with inflation. Stocks, historically yielding approximately 10% annually, significantly outperform bonds in the long run. This consistent growth is essential for maintaining financial stability across a potentially 30-year or longer retirement.
A common guideline suggests subtracting one’s age from 110 or 120 to determine the ideal percentage of a portfolio allocated to stocks. For instance, a 65-year-old might consider a 50/50 split between stocks and bonds. However, this is merely a starting point; individual circumstances and risk tolerance play a crucial role.
The ability to withstand risk, rather than mere risk appetite, is a more critical factor. Retirees with substantial savings or guaranteed income sources (pensions, Social Security) might choose a more conservative approach. Conversely, those with greater financial resilience and comfort with market volatility can adopt a more aggressive investment strategy.
Beyond stock allocation, diversification and strategic withdrawals are essential. Diversification means avoiding concentration in single stocks and opting instead for broad market index funds. ‘Bucketing’ – separating funds into readily accessible cash and bonds for short-term needs and longer-term stock investments – mitigates the risk of selling stocks at inopportune times, particularly during market downturns. Careful planning and a balanced approach are key to ensuring a financially secure retirement.
