Stocks Essential for Retirees: Experts Warn Against Cash Shift

Many retirees believe that transferring their investments entirely into cash and bonds—thus withdrawing from stocks—will provide an optimal safeguard for their retirement savings.

This belief, however, is a misconception, say financial experts.

According to financial analysts, most retirees still require exposure to stocks, which are essential for long-term growth within an investment portfolio. Such growth is crucial to avoid depleting funds in what may be a lengthy retirement period spanning decades.

“Having some equities in a retiree’s portfolio is vital for enhancing long-term returns,” stated David Blanchett, head of retirement research for PGIM, the investment management division of Prudential Financial.

The primary risk facing retirees is the danger of outliving their savings, often referred to as longevity risk, Blanchett emphasized.

Life expectancy has risen considerably, from roughly 68 years in 1950 to 78.4 years in 2023, according to data from the Centers for Disease Control and Prevention. Furthermore, projections from the Pew Research Center indicate that the number of individuals aged 100 and older in the U.S. is expected to increase fourfold in the next 30 years.

During times of market volatility, such as the recent declines related to tariff controversies, retirees might feel compelled to exit the stock market, believing that avoiding equities will shield their portfolios from potential losses.

This approach does provide a degree of security, as cash and bonds tend to exhibit lower volatility compared to stocks, thus offering retirees some protection against short-term market fluctuations.

Financial advisors often suggest gradually reducing stock investments while increasing allocations to bonds and cash. The rationale behind this strategy is to minimize the risk of significant losses for funds that may be needed in the short term.

However, experts warn that excessive reduction in stock holdings can also be detrimental.

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Retirees who significantly decrease their exposure to stocks risk falling behind inflation and may face the danger of exhausting their savings prematurely, as highlighted by Blanchett.

Historically, stocks have yielded an average return of about 10% annually, outperforming bonds by approximately five percentage points. This data underscores that, over time, stock investments tend to generate superior returns compared to bond investments.

As noted by Judith Ward and Roger Young, certified financial planners at T. Rowe Price, “Retirement can extend for 30 years or more, necessitating that your portfolio continues to grow in order to support you.”

So, how should retirees determine their stock allocation?

A widely suggested guideline is to subtract one’s age from 110 or 120 to derive the percentage of the portfolio that should be allocated to stocks, according to Blanchett.

For instance, a 65-year-old might consider a balanced 50/50 distribution between stocks and bonds as a reasonable initial approach.

An investor in their 60s may allocate 45% to 65% of their portfolio to stocks, with 30% to 50% in bonds and 0% to 10% in cash, according to Ward and Young from T. Rowe Price. For those in their 70s and beyond, a stock allocation might range from 30% to 50%, with bonds constituting 40% to 60% and cash making up 0% to 20%.

Nevertheless, each investor’s situation is unique, Blanchett acknowledged. Individual risk tolerance varies significantly among retirees.

For instance, those who have ample savings or reliable income streams, such as pensions or Social Security, may opt for a lower-risk portfolio as they do not require aggressive growth.

Another important aspect is the investor’s risk “appetite,” which influences their capacity to handle market volatility. Retirees who might feel anxious during downturns should ideally keep stock investments to 50% to 60%, as recommended by Blanchett.

Conversely, retirees who are more comfortable with risk and are better financially positioned might pursue a more aggressive investment strategy.

Experts suggest several additional factors for retirees to consider.

• Diversification. Simply investing in “stocks” does not imply concentrating funds in a specific individual stock like Nvidia or a few tech shares. Instead, Blanchett advises that a comprehensive market index fund that tracks broad market performance is a more prudent choice.

• Bucketing. For retirees, withdrawing funds from declining stock investments could severely impact the longevity of their portfolio, particularly during the initial years of retirement. It is beneficial to have distinct reserves in bonds and cash set aside for these early years, allowing time for stocks to rebound.