With retirements growing longer and the market at an all-time high, are stocks safe for retirees and pre-retirees? Conventional wisdom says that workers should enter retirement with roughly 60 percent bonds and 40 percent stocks, and that the rule of thumb for year-to-year stock allocation is 100 minus a person's age.
Given the circumstances retirees face, however, that isn't always the soundest advice, at least not for conservative clients of modest means. "I take a defensive approach with my clients 100 percent of the time," said Kyle O'Dell, President of Secure Wealth Strategies. "I like to have as much as we can on the insurance and annuities side." Whether a client is middle-aged or a few years out from retirement, O'Dell prefers an allocation skewed heavily towards cash-value life insurance, annuities and other principal-protected assets.
On the other hand, reducing the downsides of a stock-heavy portfolio may appeal to more risk-friendly retirees. "People traditionally think about reducing equities and increasing bonds, but I look at it more from a standpoint of reducing the overall volatility of a portfolio," said Hank Parrott, President of Estate and Financial Strategies. "Having someone stay in the neighborhood of 30 to 40 percent where they can keep growing their incomes for a lifetime makes a lot of sense."
Still, Parrott and O'Dell both note the importance of providing for one's lifestyle with safer and even lifetime guaranteed assets before worrying about return rates.
"If there was a ten percent chance you'd run out of money, would you be willing to take that chance?", Parrott said. "Most people don't want any chance of running out during retirement." Once clients' living expenses are accounted for, though, the rest of their allocations really come down to their risk preferences, priorities and trust in whatever system they or their advisors use to play the market. A poor sequence of returns on those "extra" savings may put a damper on vacation plans and inheritances, but it won't put anyone out on the street.
What may be a more important question, then, is how younger planners should allocate their growing assets, and when and how those allocations should change as they grow older. Middle-aged and millennial workers have decades of investments, returns and market fluctuations ahead of them, and the choices they make today will determine the lifestyles they enjoy and the amounts of money they can afford to risk in retirement.
