Most retirees should have more money in stocks than they think

It is common for those planning for retirement to feel that they should make their investment portfolios more conservative once they leave the workforce. After all, they have to live off their nest eggs for the rest of their lives and can’t afford to lose money in a declining stock market. However, new studies continue to show that most retirees can and should own more stocks rather than less if they want to beat inflation and make their portfolios last throughout retirement.

Two professors from the State University of New York at Brockport have done a new study that confirms the advantage of having more stocks in retirement. The study by John Spitzer and Sandeep Singh, published in the Journal of Financial Planning, was not even designed to prove this point. Instead, they wanted to find out whether it helped to regularly rebalance a portfolio between stocks and bonds during the period when a retiree is making income withdrawals. Many studies have confirmed the advantages of rebalancing when investing, because it forces you to stay exposed at the same levels to different asset classes even when one class is up and the other is down.

Spitzer and Singh compared six different portfolio allocations between stocks and bonds, five withdrawal rates ranging from 3% to 7% annually, and various methods of selling investments in order to raise cash for retirement expenses. Some of the selling methods were designed to keep the portfolio in its original stock/bond balance, while others were not. They then tested whether each portfolio, using the different withdrawal rates and selling methods, would last for a 30-year retirement.

Not surprisingly, those portfolios that sold off fixed income investments first and held onto stocks for later had the largest remaining balances after 30 years, the professors said. Withdrawing stocks first left more shortfalls. “The larger the proportion of stocks to bonds in the portfolio, the longer the portfolio tends to last,” they wrote.