Over the past decade, there’s been a profound shift in how retirees are investing: A lot more of them are allocating more of their total nest egg in equities.
Wells Fargo Investment Institute noted the shift, citing data from Vanguard that found more than half of 401(k) investors over the age of 55 who actively manage their money held more than 70% of their portfolios in stocks this year, compared to 38% in 2011. A poll from Gallup from earlier this year also found that 63% of those who are currently 65 and older own stocks, compared to 53% of those of the same age prior to the Great Recession.
Typically, investors are told it’s prudent to move more assets to safer investments like bonds as they age (and younger generations do hold a larger share of their portfolios in equities than older generations). But there are a number of reasons baby boomers—and to a certain extent, members of the Silent Generation—are bucking tradition, financial advisors say.
For one, equity returns have been strong since the 2008 financial crisis—especially in comparison to the bond market.
That’s appealing for retirees who wish to keep growing their wealth to provide for their retirement lifestyle, particularly as inflation has driven prices of just about everything up.
“One reason for the increased equity exposure over the last 10 years amongst retirees could be a case of FOMO,” says Cameron Valadez, certified financial planner (CFP) at Planable Wealth in California. “Equity markets have been fairly rewarding over the last decade and retail investors typically chase returns and buy when there’s upside momentum in the stock market, then get skittish when they fall.”
It also makes sense, given the longer life spans many retirees now enjoy. From 1960 to 2015, life expectancy increased from 69.7 years to 79.4 years—basically a decade. By 2060, the U.S. Census Bureau projects life expectancy will increase another six years. To fund a longer retirement, retirees need more money.
“The real risk for many retirees is running out of money before they pass, or not having enough to meet their goals and having to scale back their lifestyle,” says Valadez. Retirees see that stocks are one of the only asset classes to historically beat inflation, and they don’t want to miss out.
But it also reflects that many boomers are becoming “more risk-tolerant,” says Russell Robertson, CFP at North Carolina-based WealthCrest Financial Services. After living through their fair share of crises, they’re less fazed by a down market like last year’s.
“Today’s retirees have lived through the crash of October ’87, the dotcom bubble popping, the Financial Crisis of 2008, the COVID panic, and finally, the 2022 correction,” says Robertson. “In all cases, they have seen the stock market come back.”
That optimism isn’t necessarily misplaced, but financial advisors say retirees need to understand that it still comes with plenty of risk.
The most obvious: If a downturn comes and a retiree needs to cash out some of their shares, they will have to sell at a discount. It might have been possible for investors to ride out other downturns—and even benefit from buying the dip—but there’s no guarantee that will happen next time. It can take the market years to recover from a significant downturn.
Take, for example, medical costs. These are significant, especially in retirement, and are expected to keep growing. Retirees may not have a ton of options except to liquidate some of their investments if they need to pay for care.
“The stock market losses from 2008 to 2009 may have faded from memory, [but] they were dramatic,” says Herschel V. Clanton, CFP at Atlanta-based Chancellor Wealth Management.
And with bond yields rising sharply, retirees could start rebalancing soon, advisors say.
“While bond prices are down, yields have returned to a more reasonable level, and can provide that hedge against a decline in the equity markets,” says Clanton. “This might be a good time to bring balance and caution to the investment approach.”
