New data from Vanguard highlights a growing trend: a surprising number of older retirees are holding most of their assets in stocks, far beyond what traditional retirement planning guidelines suggest. As market dynamics shift and lifespans increase, this approach introduces risks that can undermine long-term financial security. Understanding how to strike the right balance between growth and protection becomes critical—especially when retirement income and peace of mind are at stake.
Understanding Retirement Portfolio Risk
Holding a high concentration of stocks during retirement can expose investors to substantial market volatility. Stocks typically offer growth potential but come with higher risk, especially in the volatile years of retirement. Standard financial advice often recommends reducing stock exposure to protect fixed income and preserve capital.
Recommended Portfolio Allocation by Age
Stacy Francis, CEO of Francis Financial, suggests that retirees around age 60 aim for a more balanced portfolio with a 50/50 split between stocks and bonds. This allocation helps balance growth opportunities with income stability. For investors in their 50s who are still earning, a 60/40 stocks-to-bonds ratio may be appropriate, allowing for continued portfolio growth while beginning to introduce risk mitigation.
Rebalancing: The Key to Managing Portfolio Risk
Francis emphasizes the importance of rebalancing portfolios twice a year, specifically in January and July. Rebalancing ensures that the stock and bond ratio stays within the target range, preventing unintended portfolio risk from developing due to market fluctuations. This disciplined approach reduces the likelihood of being overexposed to stocks when markets peak or underexposed during downturns.
A Holistic View of Risk Beyond Age-Based Rules
Jack VanDerhei from Morningstar points out that investors should evaluate risk considering all assets and income sources, rather than following rigid age-based rules or comparing with peer portfolios. The Vanguard data referenced only taxable brokerage accounts, excluding retirement accounts like IRAs or 401(k)s, which may have different allocations. This highlights the need for personalized strategies tailored to individual financial circumstances.
Mitigating the Risk of Running Out of Money
To address the risk of exhausting retirement funds, Francis advises increasing savings early in the retirement planning process, carefully adding stock exposure for growth, or extending one’s working years. Many retirees today supplement their income through part-time work or consulting, enhancing financial security and reducing reliance on portfolio withdrawals.
Benefits of a Balanced Approach to Retirement Investing
Maintaining a diversified portfolio with appropriate stock-bond balance can provide steady income and capital growth, cushioning against inflation and market downturns. This balanced approach supports long-term financial stability and helps retirees manage both longevity risk and market risk effectively.
Practical Steps for Retirees Considering Portfolio Adjustment
- Evaluate current portfolio composition relative to target stock-bond allocation.
- Consider professional advice to tailor allocations based on total asset picture and retirement goals.
- Schedule biannual portfolio reviews to rebalance holdings.
- Factor in income sources like pensions, Social Security, and part-time earnings when assessing risk.
- Plan for gradual adjustments as age and market conditions evolve.
Careful allocation between stocks and bonds, combined with regular portfolio reviews and consideration of individual circumstances, empowers retirees to sustain their finances and enjoy greater peace of mind during retirement.