For retirees, the question of how much stock market exposure to maintain is a critical one. The conventional wisdom has shifted, and financial advisors now recommend a more proactive approach to retirement investing. Instead of being overly conservative, retirees should aim for a balanced portfolio with a significant equity component, typically between 40% and 80%, to generate income and mitigate inflation and longevity risk. This perspective challenges the traditional rule of thumb to reduce equity exposure as soon as retirement begins.
Cheri Belski, head of investment management solutions at LPL Financial, emphasizes the importance of intentional retirement planning rather than a conservative mindset. She argues that retirees should not be afraid to take on some risk with equities to ensure their portfolios have a fighting chance of keeping up with their retirement expenses over the next 30 years. The stakes are high, with over 4.1 million Americans turning 65 annually from 2024 to 2027, according to the Retirement Income Institute.
Stuart Katz, chief investment officer of Robertson Stephens, supports this view, suggesting that a 'growth with guardrails' approach is ideal for retirement. He advises against being overly aggressive but emphasizes the need for long-term growth potential in the portfolio to address longevity and inflation risks. Collin Lindsey, a wealth manager, recommends an equity allocation of 40% to 60% for clients in their late 60s and early 70s, depending on their overall retirement resources and risk tolerance.
Diversification is key within the equity portion of the portfolio. Retirees should hold international stocks and stocks with different market capitalizations, with a mix of growth-focused and income-generating assets. Avoiding sectors like technology, which can be volatile, is also crucial. Matt Gentzkow, a wealth advisor, highlights the importance of stress-testing financial plans to ensure they remain appropriate during periods of lower returns. He suggests a more conservative projected return rate of around 6% to 7% for stocks.
As retirement progresses, advisors often recommend shifting the focus to income and capital preservation while maintaining equity exposure. An 80-year-old might still want equities at a 20% to 40% range, according to Katz. This can be achieved through dividend-paying stocks, income ETFs, and international dividend-focused funds. Target-date funds offer a simpler solution, gradually reducing equity exposure over time but not eliminating it entirely.
In conclusion, retirees should carefully consider their stock market exposure, balancing the need for income and wealth preservation with the risks associated with inflation and longevity. Regularly reviewing and adjusting portfolios based on changing circumstances and market conditions is essential to ensure a secure and comfortable retirement.
