As older Americans approach retirement, it’s only natural for them to expect a reduction in equity investments. Less risk to stock exposure is a conservative (and wise, many would say) move.
So, what would cause you to advise a retiree to increase their stock allocation? And how uncomfortable may that discussion be?
Let’s explore some factors and situations that could play into this scenario and how an advisor may recommend what some may consider “unconventional” investing.
Having a Safety Net May Open up Possibilities
Let’s say your client has a source of guaranteed income — a pension, Social Security, income annuities, or a combination of all three. Depending on the lifestyle and needs of some investors, the income from these types of programs and products may be enough to cover their baseline expenses. Any income beyond these sources may be somewhat discretionary.
For those whose baseline needs are met as a result of their guaranteed income stream, they may want to consider stepping up stock allocation in retirement.
A smooth, regular stream of guaranteed income is like having a safety net in place. The risk associated with stocks doesn’t go away, but the consequences that come with investment volatility are lessened. So retirees may want to consider taking on more risk by adding to their stock exposure.
Guaranteed Income Could Boost Courage in the Face of Risk
Time needs to be a consideration, as does an investor’s risk tolerance. Recent market volatility has proven that, in the short-term, equity investments carry real risks. Depending on where a client is in their retirement journey, they may not be comfortable shifting their diversification strategy or putting a portion of their savings at risk over the prospect of potential gains, especially when there’s a comparable prospect of potential loss.
Longevity is, of course, the biggest unknown but, for clients who feel they may have a longer horizon and have weighed the potential risks and rewards, equity investments may warrant serious consideration that might bring positive results over the long term.
As an example, if an investor has 20% of her assets in an income annuity, she may want to consider reallocating a portion — say, 5% — of her remaining assets away from bonds and place them into stocks. While it may seem a modest adjustment, the potential for long-term gains may be desirable.
Because she knows she can always fall back on her baseline guaranteed income from an annuity, Social Security and a potential pension, the slight shift in how her remaining assets are allocated may still fall within her risk parameters.
To help her understand how such an adjustment may be beneficial, compare prospective gains over the next 5–10 years in alignment with other projection models. Likewise, help her to understand the potential risks and consequences in the event those long-term gains aren’t realized. Being transparent about both scenarios can help her make an informed decision.
Knowing how much income they’ll receive each month is critically important to many retirees. So far, Social Security seems viable for the foreseeable future, and those who are fortunate enough to receive guaranteed pensions can rely on them throughout retirement. Some annuity products can also provide the assurance of guaranteed income for life and even bridge a widening income gap.
There are innovative annuity products that allow your clients to benefit from market gains while limiting their loss potential at a threshold that’s comfortable for them. The “income floor” that an annuity provides can change a portfolio’s dynamic. Some investors may even consider an income annuity as the “bonds” portion of the portfolio, with the other allocations being the equity exposure.
Another plus? Retirees are less likely to spend down their invested assets too quickly thanks to the safety net of a guaranteed income annuity, stretching their assets over the long term and bringing peace of mind.
A Smart, Long-Term Strategy
As your clients get older, conventional wisdom suggests shifting portfolios to conservative investments; you never know the timing of a bear market. Cautiousness can surely be a virtue in long-term investing.
So, it may be rare that you’d suggest that a retiree increase their stock exposure. However, if the situation is right (and some guaranteed income is in play), dipping their toes in traditional stocks may make sense.
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