Taking Too Much Risk in Retirement

Investing in retirement is a relatively new field. We’ve been leaders in developing strategies that differ from the long-time conventional strategies, but people have been slow to follow. Most retirement portfolios are either too conservative or too risky. On the latter side are portfolios that continue the same allocation the owner adapted many years before retirement. The retired investor definitely needs growth in a portfolio to compensate for inflation and unexpected expenses. But too many retirement portfolios have too much risk, meaning too many stocks.

A new report from the Putnam Institute (sponsored by Putnam Financial) agrees that many portfolios of retirees have too much invested in stocks. The report concludes that only 5% to 25% of a portfolio should be in equities.

We find that the range of appropriate equity asset allocations in retirement is strikingly low compared with those of typical lifecycle and retirement funds now in the marketplace. In fact, for retirement portfolios whose primary goal is to mini- mize the risk of depletion and sustain withdrawals, optimal equity allocations range between 5% and 25%. This quite conservative level of equity holdings changes little even when we significantly change our assumptions on capital market returns. We even find that more aggressive equity allocations, those that still retain some focus on depletion risk but also seek to provide substan- tial bequests to heirs, are also relatively conservative. The study suggests,
in short, that the higher equity allocations used in many popular retirement investment products today significantly underestimate the risks that these higher-volatility portfolios pose to the sustainability of retirees’ savings and to the incomes they depend on.

Keep in mind that Putnam Financial is marketing an alternative to target date funds currently in the marketplace.