WSJ: Retirement portfolios at risk as market volatility returns

With stock market volatility making more of a comeback in recent weeks, the retirement portfolios of older investors – many of which are reliant on stocks – are now at greater risk than they have been over the past year. The new volatility has introduced that risk particularly for portfolios that have a higher-than-recommended concentration of stocks. This is according to reporting by the Wall Street Journal.

“Data from Fidelity Investments’ 20.4 million 401K investors shows that almost 40% of 401K investors age 60 to 69 hold about 67% or more of their portfolios in stocks,” the reporting explains. “Among retail clients at Vanguard Group between ages 65 and 74, 17% have 98% or more of their portfolios in stocks.”

Such a concentration of stocks tends to go against conventional wisdom, the reporting says, where typical guidance involves moving away from stocks on their own and more toward a mix of stocks and bonds in later life.

“The goal is to reduce the effects of a bear market when taking withdrawals, a combination that can deplete a nest egg,” the report says. “Older investors’ decision to keep so much in stocks is facing a test right now.”

The market has made some notable recoveries in the past few days, however recent flashes of volatility are unlikely to dissuade members of the baby boomer generation from maintaining their current investment levels in stocks according to financial planners and advisers who spoke to WSJ about their patterns of behavior.

“Some older Americans may be taking an aggressive approach to investing because they have money coming in via pensions or a paycheck that covers much of their spending needs,” the report says. “Other people appear to be rolling the dice on stocks to get a higher return than bonds to support a lifestyle they couldn’t otherwise afford, advisers say. With bond yields low, some are loading up on stocks that produce high-dividend yields to generate a retirement income without dipping into principal.”

The market’s closure on Monday indicated that while it has shown improvement in the past five days, the S&P 500 in January 2022 suffered its worst monthly performance since March of 2020 when the pandemic began, according to a report at WSJ.

When the stock market was beginning to experience its first wave of disruptive volatility during the onset of the COVID-19 coronavirus pandemic in early 2020, some financial advisers – including Dr. Wade Pfau of the American College of Financial Services – increasingly described reverse mortgages as a product that provides a path to avoiding sequence of returns risk.

“Even if the overall market recovers, a retiree spending from their portfolio might not get to enjoy that recovery,” Pfau told RMD in an appearance on The RMD Podcast in April, 2020. “And that sequence of returns risk amplifies the impact of investment volatility. So, that’s where a reverse mortgage can fit into this in a number of different ways to help alleviate that risk on the investment portfolio.”

Read the story at the Wall Street Journal, subscription required.

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