How heavily should a retiree invest in the stock market?

Common sense seems to tell those who are in or approaching retirement that they should cut back on their investment risk. After all, they will have to rely on it for income and feel they can’t afford to lose it. One rule of thumb says that you should subtract your age from 100 and the remainder is the percentage that should be invested in stocks. By that measure a 70-year-old should invest only 30% of a portfolio in stocks.

Research into retirement income generation in recent years has turned these common sense ideas on their heads. Although the stock market can be risky in the short term, the studies say that a retiree’s biggest worry is keeping up with inflation. Over the long term, supposedly “safe” fixed income investments do not tend to keep up with inflation, especially after taxes are paid on interest. The stock market does keep up.

A new study by Consumer Reports magazine and the investment research firm Ibbotson Associates looked at the performance of a wide range of stock and fixed income portfolios over the past 66 years. The study adjusted returns and annual withdrawals for inflation. It found that an all-stock portfolio handily beat an all bond portfolio, providing an average of over $750,000 in extra retirement income on a portfolio that begins retirement at $500,000. This result held up no matter which 20 and 35-year market cycle was chosen, meaning that it did better even in periods that included severe bear markets.

An all-stock portfolio may be impractical for many retirees, both because they may feel terrible during market declines and also won’t have a source for withdrawals. Consumer Reports suggests an 80/20 or 70/30 stock to bond mix instead.