Re-evaluating Traditional Investment Rules
For decades, a common rule of thumb for retirees was the “100 minus age” formula, which suggested a 70-year-old should have 30% of their portfolio in stocks and 70% in less volatile assets like bonds. However, with longer life expectancies, this approach may no longer be sufficient. Being too conservative can lead to a significant threat known as inflation risk, where your savings lose purchasing power over time. To ensure your nest egg lasts, many experts now suggest more growth-oriented formulas like the “120 minus age” rule, which could mean a 70-year-old holds up to 50% in stocks. The correct balance depends heavily on your personal financial situation, income needs, and emotional comfort with market volatility.
Key Financial Risks for Retirees at 70+
At age 70, investment risk takes on a different meaning than during your working years. You are no longer primarily accumulating wealth but generating income from it. This transition introduces new critical risks to manage.
Longevity Risk
- Definition: The risk of outliving your retirement savings.
- Mitigation: A degree of investment growth is necessary to ensure your money lasts a potentially longer lifespan. Strategies to generate guaranteed income, such as annuities, can help.
Sequence of Returns Risk
- Definition: The risk that negative market returns occur early in your retirement, forcing withdrawals from a diminished portfolio.
- Mitigation: This is one of the most critical risks for new retirees. Having a cash reserve or using a "bucket strategy" can help you avoid selling assets at a loss during a market downturn.
Inflation Risk
- Definition: The risk that rising living costs will erode the purchasing power of your savings over time.
- Mitigation: Fixed-income-heavy portfolios may not keep up with inflation, especially rising healthcare costs. A balanced portfolio with some exposure to growth assets like stocks can act as a hedge.
Balancing Growth, Income, and Safety
For investors in their 70s, a balanced approach is key. It involves allocating funds to ensure a stable income stream while also allowing for some growth to combat inflation. Your ideal strategy will likely combine stable assets with a smaller, but still meaningful, portion of growth-oriented investments.
The 'Bucket Strategy'
This popular strategy helps manage sequence of returns risk by dividing your portfolio into time-based segments.
- Short-Term Bucket (Years 1-3): Invested in cash or cash equivalents like high-yield savings accounts and money market funds to cover immediate expenses. This is a buffer against market volatility.
- Medium-Term Bucket (Years 4-10): Allocated to moderately conservative investments such as intermediate bonds and high-quality dividend stocks. These can provide income and moderate growth.
- Long-Term Bucket (Years 10+): Invested in growth-oriented assets like U.S. and international stock funds. This portion is for fighting inflation over the long haul and replenishes the other buckets over time.
Recommended Investments for a Balanced Portfolio
- Bonds: A diversified bond portfolio, including U.S. Treasuries, municipal bonds, and high-quality corporate bonds, can provide stable income. A bond ladder can also help mitigate interest rate risk by staggering maturity dates.
- Dividend-Paying Stocks: High-quality stocks that pay reliable dividends can provide a steady income stream while maintaining potential for long-term growth. Utilities, consumer staples, and financials are often good candidates.
- Annuities: An insurance product that offers a guaranteed income stream, often for life. A fixed income annuity can protect against longevity risk, while a variable annuity can offer more growth potential but with greater risk.
- Certificates of Deposit (CDs): A safe, FDIC-insured option for holding money for a set term at a fixed interest rate.
- Real Estate Investment Trusts (REITs): REITs allow you to invest in a portfolio of income-producing properties without direct ownership, offering dividends and diversification.
Asset Allocation Comparison for a 70-Year-Old
| Feature | Moderately Conservative (40% Stocks) | Moderate (50% Stocks) |
|---|---|---|
| Primary Goal | Strong emphasis on capital preservation and steady income. | Balanced approach for sustained growth to outpace inflation. |
| Stock Allocation | 40% | 50% |
| Bond Allocation | 50% | 50% |
| Cash Allocation | 10% | 0% (integrated into liquid funds) |
| Inflation Hedge | Moderate protection; potential for purchasing power loss over time. | Stronger hedge against inflation risk due to higher equity exposure. |
| Market Volatility | Less susceptible to market swings; better for risk-averse investors. | More susceptible to short-term market volatility but better long-term growth. |
| Longevity Risk | Higher risk of outliving savings if not supplemented by other income. | Better positioned to combat longevity risk with higher growth potential. |
The Role of Personal Circumstances
Ultimately, there is no universal answer to how risky should a 70-year-old's investments be? Your personal health, retirement income from sources like Social Security and pensions, and lifestyle goals should dictate your strategy. A large portfolio may afford more conservatism, while a smaller one may need more growth exposure. Regularly reviewing and rebalancing your portfolio, perhaps annually, is crucial to ensure it stays aligned with your evolving needs and market conditions. For many, consulting with a financial advisor specializing in retirement income can provide a tailored, written plan that removes guesswork and emotional decision-making.
Conclusion
While a 70-year-old investor should prioritize capital preservation and a reliable income stream, ignoring growth entirely is a mistake that can be compounded by inflation and longer life expectancies. A balanced approach that intelligently incorporates a mix of stocks, bonds, and cash equivalents can help manage the unique risks of retirement. Strategies like the "bucket system" or diversifying across different asset classes allow for a structured approach to market volatility and withdrawal needs. By understanding and actively managing risks like inflation and sequence of returns, a 70-year-old can achieve a portfolio that is both stable and sustainable for the long term. This approach moves beyond outdated rules of thumb, focusing instead on a personalized strategy tailored to the realities of modern retirement planning.
