How extra stock exposure helps older Americans in retirement

Older Americans hold a bigger share of stocks than they’d like, according to the Center for Retirement Research — but that could work in their favor.

Researchers say older Americans tend to be more pessimistic about the stock market than historical data suggests they should be. In surveys conducted by the University of Michigan Health and Retirement Study, which tracks roughly 20,000 Americans over time, about 60% of respondents on average expect the market to rise. Historically, however, the market has increased around 75% of the time.

That view of the market extends into investors’ desired stock allocations. In a CRR analysis of Americans ages 50 to 78 with $100,000 or more in investible assets, investors say they want to allocate 37% of their portfolio to stocks, on average.

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In practice, however, their actual allocations are higher. Other research on a comparable group of investors shows that 43% to 48% of their portfolios are invested in stocks, well above their stated preference.

Researchers at the Center for Retirement Research say that dissonance could be driven by the growing popularity of target date funds.

“The low level of desired holdings is consistent with households’ overly pessimistic views of stock returns, and the higher level of actual holdings likely reflects the default allocations in 401(k) plans — namely target date funds,” the researchers wrote. “In short, people seem to be holding more equities than they want, but that pattern is probably good for them.”

Financial advisors tend to agree with that view.

“If they held what they preferred, they probably wouldn’t get very far,” said Ed Snyder, co-founder of Oaktree Financial Advisors in Carmel, Indiana. “This is why they need an advisor. To guide them to what they should be doing because the client doesn’t really know what they should do.”

Weighing performance over preferences

With living expenses and life expectancy on the rise, advisors say allocating more of a portfolio to equities is essential for near-retirees and retirees alike.

That approach represents a distinct departure from previous norms, in which retirees largely moved their portfolios over to fixed income products with the goal of preserving their nest egg, according to Crystal McKeon, the chief compliance officer at TSA Wealth Management in Houston.

“One of the problems with this mentality is the extension of the life of humans over the last few decades,” McKeon said. “The average lifespan has extended from the high 60s in the 1950s to almost 80 years of age today. With those changes, retirees will have to live on that money over a decade longer than previous generations. This means that adding some stocks can help investors keep their money growing so that they don’t outlive their money.”

When working with a client, creating that allocation isn’t as simple as moving money around in an account, advisors say.

Charles Kyle Harper, founder of Harper Financial Planning in West Columbia, South Carolina, said that when he recommends a certain stock allocation for a client, he first spends the time educating them on why he’s recommending that particular approach.

“I’ve found that the apprehension to owning equities as investors age comes down to mostly a lack of education and not necessarily an opposition to risk,” Harper said.

Still, if a client isn’t comfortable with a heavier stock allocation, Harper said he won’t force a plan on anyone.

“If they are still resistant, a plan the client is comfortable with and will stick to is better than an amazing plan they won’t,” Harper said. “This is where the art of financial planning bests the science of financial planning. Having open and honest conversations with clients about whether or not they are comfortable is key to designing a long-term, durable plan.”

When the ‘best’ plan isn’t the best plan

While researchers suggest that holding more stocks than preferred could benefit older Americans, advisors working directly with clients say the reality isn’t so simple.

Hardik Patel, founder of Trusted Path Wealth Management in Santa Rosa, California, said that no matter how good a plan is on paper, it only works if the client can stick to it.

“A key part of investing is ensuring that a portfolio aligns with an investor’s risk tolerance and capacity through proper asset allocation,” Patel said. “If an investor takes on more risk than they are comfortable with, there’s a real chance they could panic and sell during a downturn, which can have serious consequences.”

Intentionality, in other words, is everything.

While vehicles like target date funds may do a better job of stock allocation than investors would on their own, their “autopilot” approach to investing is far from ideal, according to Patrick Huey, founder of Victory Independent Planning in Camas, Washington.

“Asset allocation shouldn’t be left to chance or inertia,” Huey said. “Every client’s mix of stocks and bonds should be the result of a thoughtful plan based on real numbers: spending needs, longevity risk and personal circumstances — not just a gut feeling or a default setting.”