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Myth #5- Retirees Are Conservative Investors

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At a Barron’s conference of the nation’s top financial advisors, a speaker noted that about 90% of all retirement accounts are in distribution mode. This reflects the fact that there are about 50 million people in America who are over 65 who need to use their investment portfolios to fund their lives. The retirement community is growing. On a daily basis, more than 10,000 people turn 65. This creates a Gray Swan risk factor that is not yet well understood – especially by retirees. Most people are unaware that they cannot take out more than 4% of their investment account in any given year. If they take out more, they trigger a depletion schedule, a fact too many people have learned the hard way.

Just as financial literacy remains one of the nation’s great crises, the retirement crisis is another. Too few people are fully prepared for retirement. Most people have not saved enough, nor done enough to reduce their expenses. All of these factors put enormous stress and pressure on their investment accounts, and it creates an emotional tinderbox for retirees, their families, and their financial advisors.

Retirees should be in some sort of nesting mode. They should have matched their resources to a new chapter of life. But most have not prepared for retirement, and they are living longer than expected. The country has never before experienced this kind of demographic shift in which a significant portion of the nation’s workforce is confronting retirement, and the vast majority are ill-prepared to live off their savings.

Those facts, essentially by definition, force many retirees to remain heavily invested in equities, and thus exposed to the full risks of losing their money when they have no time to recover. This need for return has created a class of investors who are increasingly sensitive to every hiccup in the stock market. Bonds are incredibly unattractive because yields are so low that they are basically negligible after adjusting for inflation.

Meanwhile, their children are watching their parents very closely, trying to help them, if they can. Everyone is developing very sharp views on the stock market and financial advisors at a time when Baby Boomers are about to commence the greatest wealth transfer in the history of the world.

Some $50 trillion is expected to pass to the Millennials, a generation that is increasingly revealed to be extremely risk-averse, and eager to live their lives differently than that of their parents whom they have often seen struggle to pursue an elusive American Dream even after having done everything they were supposed to do. After all, the Millennials have lived through the greatest financial crisis since the Great Depression, an experience that has made many of them amass cash because they are wary of the financial markets even though investing in securities remains one of the best ways to build wealth.

These situations demand proactive treatment, which might help multi-generations of the same family not completely lose faith in the markets and financial system. By defining the risk of owning stock, and defining the amount of money that can be lost to the vagaries of the market, retirees can potentially alleviate a lot of the anxiety and financial troubles that trap so many of their peers. Consider the practical ramifications. Required Minimum Distributions from retirement accounts have turned a growing number of retirees into market timers. They are always trying to pick the sweet spot for selling that year’s required amount. Others are trying to time other sales to fund vacations and basic life necessities. If the stock market swoons around the times when they need to sell stocks, they find themselves stuck in holes of their own design. To regain stable financial footing, they are ultimately forced to take on more and more risk just to stay even with their lifestyle needs. It is a vicious cycle that can, and should, be mitigated by managing portfolio risk.

StratiFi’s PRISM Ratings™ risk scoring technology provides RIAs, asset managers, and broker-dealers more insight into the risks in their clients’​portfolios and their own business, so they can pick the risks they want to take. Contact the StratiFi team to find out more and get started today!

Akhil Lodha
Akhil Lodha Author
Co-founder & CEO StratiFi Technologies

Building the industry standard for understanding portfolio risk through cutting- edge technology at Stratifi.

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