Finding the Right Balance: How Much Should Retirees Be Invested in the Stock Market?

Why Stocks Still Matter in Your Golden Years

Retirement is that magical time when you finally get to kick back relax and hopefully not worry too much about money. But here’s the kicker – making your nest egg last through retirement might be trickier than you think. One of the biggest questions retirees face is how much of their hard-earned savings should remain invested in the stock market.

If you’re like most retirees, you might be tempted to pull everything out of stocks to “play it safe” After all, who wants to risk losing their retirement savings on market volatility? But before you ditch stocks completely, there’s something important you should know completely abandoning stocks during retirement could actually be riskier than keeping some skin in the game.

Let’s dive into what experts are saying about this crucial retirement question and find the right balance for your situation.

The Biggest Risk Isn’t What You Think

Most retirees worry about market crashes wiping out their savings. But according to David Blanchett, head of retirement research for PGIM (an investment management arm of Prudential Financial), the biggest financial danger for retirees isn’t a market downturn – it’s longevity risk, or the risk of outliving your savings.

This makes total sense when you consider these facts

• The average life span has increased from about 68 years in 1950 to 78.4 in 2023
• The number of 100-year-olds in the U.S. is expected to quadruple over the next three decades
• Retirement can last up to 30 years or more for many people

So while it might feel safer to move all your investments to cash and bonds, you might actually be putting yourself at greater risk of running out of money during what could be decades of retirement.

The Growth Engine Your Retirement Needs

Here’s the deal – stocks have historically delivered returns of about 10% per year, outperforming bonds by approximately five percentage points, according to Blanchett. That growth potential is crucial for making sure your money lasts.

“It’s important for retirees to have some equities in their portfolio to increase the long-term returns,” Blanchett explains.

Without that growth engine, your portfolio might struggle to keep pace with inflation and everyday expenses over a retirement that could last 20, 30, or even more years.

So How Much Stock Exposure Should Retirees Have?

There’s no one-size-fits-all answer, but here are some guidelines from financial experts:

The Simple Formula Approach

One traditional rule of thumb is to subtract your age from 110 or 120 to determine what percentage of your portfolio should be in stocks.

For example:

• A 65-year-old would have 45-55% in stocks (110-65=45 or 120-65=55)
• A 75-year-old would have 35-45% in stocks (110-75=35 or 120-75=45)

Blanchett suggests that a 50/50 allocation to stocks and bonds would be a reasonable starting point for a typical 65-year-old.

Age-Based Recommendations

According to T. Rowe Price financial planners Judith Ward and Roger Young, here’s how your allocation might look:

In your 60s:

• 45% to 65% in stocks
• 30% to 50% in bonds
• 0% to 10% in cash

In your 70s and older:

• 30% to 50% in stocks
• 40% to 60% in bonds
• 0% to 20% in cash

Real-World Data

Interestingly, a Vanguard report showed that investors aged 65 and older had an average of 49% of their portfolios allocated to stocks at the end of 2023. This is significantly higher than what the old “100 minus your age” formula would suggest.

Why You Might Need More Stocks Than Previous Generations

Lazetta Rainey Braxton, co-CEO at financial planning and wealth management firm 2050 Wealth Partners, points out that today’s retirees may need to hold more stocks than previous generations to ensure their portfolios last long-term.

She gives this example: A 70-year-old investor who holds only 30% in stocks and 70% in fixed income might struggle to meet their spending needs if they live into their 90s. “Is the (fixed) income portfolio generating enough money to carry another two decades? The answer is typically ‘no,'” Braxton says.

When Less Stock Exposure Makes Sense

Your ideal stock allocation also depends on your personal situation. You might consider a lower stock allocation if:

• You’ve saved more than enough for retirement
• You have substantial guaranteed income from pensions and Social Security
• You have a low risk tolerance and know you’ll panic during market downturns
• You need to draw heavily from your portfolio for immediate living expenses

The Recent Opportunity with Higher Interest Rates

Interest rates have risen significantly in recent years, which creates an interesting opportunity for retirees. With bonds now offering yields of 4-5%, which is only slightly below long-term stock market returns, retirees have a chance to lock in decent returns with less risk.

Braxton sees this as a great time to diversify between stocks and bonds, while Beverly suggests that more conservative investors should tilt their portfolios toward fixed-income investments in the current environment.

Testing Your Portfolio’s Resilience

Beverly suggests a practical approach to determining if you have the right asset allocation: See how your portfolio would perform in a worst-case scenario. Ask yourself if you could meet your spending needs if stocks fell 30% or more.

“Once you get comfortable with the worst-case scenario, then you know that’s likely the right portfolio for you,” Beverly says. If not, you may need to adjust to a more conservative allocation.

Target-Date Funds and Your Stock Allocation

Many investors have essentially outsourced the asset allocation decision by using target-date funds, which automatically shift the portfolio toward safer investments as the target retirement date approaches.

However, these funds often maintain higher stock allocations than you might expect:

• The Vanguard Target Retirement 2025 Fund has about 51% of its assets in stocks
• The Vanguard Target Retirement 2035 Fund has about 68% of its assets in stocks

This suggests that professional fund managers see value in maintaining substantial stock exposure even as investors approach and enter retirement.

The Buckets Approach to Managing Stock Risk

One strategy that can help retirees maintain stock exposure while minimizing risk is the “bucketing” approach. This involves:

1. Having separate buckets of bonds and cash to pull from for short-term expenses
2. Keeping longer-term money invested in stocks
3. Avoiding selling stocks during market downturns

This approach allows you to give your stock investments time to recover during market dips, while still having access to the cash you need for immediate expenses.

Our Take on Retirement Stock Allocation

At our firm, we typically recommend retirees maintain at least 30-50% in stocks throughout retirement, adjusted based on individual circumstances. The exact amount will depend on:

1. Your retirement income needs
2. Other income sources (Social Security, pensions)
3. Your personal risk tolerance
4. Current market conditions
5. Your legacy goals (if any)

Remember, the goal isn’t to time the market or get rich quick – it’s to make sure your money lasts as long as you do.

Bottom Line: Finding Your Balance

The right stock allocation for retirees varies based on individual circumstances, but should generally decrease as you age. Consider working with a financial advisor to stress test your portfolio and understand how you’d fare under various scenarios.

With today’s longer lifespans, most retirees simply can’t afford to completely abandon stocks. Finding the right balance between growth (stocks) and safety (bonds and cash) is key to ensuring your retirement savings go the distance.

We’ve seen many clients who were initially nervous about keeping money in the stock market eventually become comfortable with a balanced approach after understanding the true risks of being too conservative. Remember – your retirement could last decades, and your investment strategy should be designed with that timeframe in mind.

What’s your current stock allocation in retirement? Do you feel it’s serving your needs? We’d love to hear from you in the comments!

How much retirees should have in stocks varies, but a good starting point is the “110 or 120 minus age” rule, with a typical 65-year-old holding about 50-55% in stocks, a 70-year-old around 40-50%, and older individuals often holding 30-40%. This mix provides a balance between the potential for growth and the need for stability, with the stock percentage decreasing as age increases.

A 70-year-old’s stock market allocation can range from

$20\%$

to

$50\%$

, depending on risk tolerance and financial goals, using rules like the “100 minus age” or “120 minus age” as a starting point. The traditional “100 minus age” rule suggests about

$30\%$

in stocks, while a more modern “120 minus age” rule suggests a higher allocation of up to

$50\%$

to help outpace inflation over a longer life expectancy.

Warren Buffett’s 90/10 rule is a simple investment strategy that recommends putting 90% of a portfolio into a low-cost S&P 500 index fund and the remaining 10% into short-term government bonds. This strategy was famously outlined in Buffett’s instructions for managing his wife’s inheritance, and its goal is to provide simplicity and strong long-term growth for average investors who may not have the expertise to outperform the market through active trading.

Approximately 2.5% to 4.7% of all American households have $1 million or more in retirement savings, according to recent analysis of 2022 Federal Reserve data.