Don’t dismiss stocks as investment strategy even if you are retired. Examine your options

A common question in retirement planning is how much of your investments should be in stocks when you transition from receiving a regular paycheck to piecing together your income from different sources for the rest of your life.

In volatile times for stocks, as we’ve experienced over the past month, it can be tempting for retirees to think they should reduce exposure to riskier assets and possibly change their investments compared to how they invested when they were still contributing to retirement accounts. But there are many factors to consider when making this decision. Often, when confronted with a complex decision, people choose to follow more simple rules of thumb instead. In this case, a commonly communicated formula to determine an appropriate weight of stocks in your portfolio is to subtract your age from 100. For instance, if you are 65, your portfolio should hold 35 percent stocks and taper down from there.

Basing your lifetime financial security on a rule of thumb, however, might not thoroughly address opportunities and challenges specific to your situation. There are several reasons why this rule of thumb is flawed.

Your age is just one of many important inputs, but age is a relative number. Not everyone retires at the same age or lives to the same age. Should someone who has longevity in their family genes and might live into their 90s invest the same way as their same-aged neighbor with a family history of death in the 70s? Even between spouses, there might be significant differences in life expectancy that need to be supported from the same pool of money.

A more important factor in the stock-weight equation than age is how much ongoing income you have from sources such as Social Security, pension or an annuity. You must understand how much of a gap that income leaves when compared to your planned spending.

You could take two retiring 65-year-olds with the same investment balance and life expectancy but, in addition to Social Security, one has a reliable income stream from a pension, while the other does not. In this case, the retiree without the extra steady income is likely to need more income-producing assets in the investment portfolio which might mean a lighter weight of stocks.

Once you have a sense of life expectancy, the amount of your assets and income needs, then it’s important to understand your comfort level with stocks. Over short periods, stocks can have a wide range of outcomes. Over longer periods, stocks have been less risky. The challenge is that you don’t get to define the start and end dates of market cycles and coordinate them with your needs. The stock markets have no idea of your timeline, the variability in your income needs or how your gut feels when current investment returns deviate from your expectations.

One retiree might be very comfortable with a wide range of short-term outcomes for stocks, expecting that, over the long term, disciplined investing will be rewarded. However, someone of similar age, income and expected spending might have a very different comfort level with the short-term volatility of investing in stocks. Sometimes, that someone resides in the same house. Determining how to invest to satisfy both spouses’ comfort can be a delicate maneuver.

Once settled on the weight of stocks that is best aligned with your income needs, return expectations and comfort with risk – not just your age – there are still important nuances to understand about the selection of investments. It is possible to choose a simple index of global stocks for the entire stock market portion of your portfolio to reduce the number of decisions you have to make. But most people don’t invest that way. Within the global stock market, there are decisions to make regarding the balance of U.S. vs. international stocks, growth vs. value companies or small vs. large companies. Some investors in retirement might prefer to tilt their investment strategy toward dividend-paying stocks for more income. Others, especially if they have plenty of income from other sources, might prefer a growth-oriented approach that could provide larger, if more speculative, returns. This might be the case for someone who is investing with heirs in mind and wants to position for growth across multiple generations, not just their lifetime.

Aside from thinking about stocks, another challenge of the 100-minus-your-age guide is that this worked better when bonds generated higher income over most of the past four decades. At least for the next several years, bonds are not expected to produce returns close to their averages since the 1980s.

Rules of thumb assume broad applicability, that one size fits all. That doesn’t work when investing in retirement where a more personalized, adaptable approach can make a difference.

This story was originally published January 31, 2022 at 5:00 AM.