Retirees should increase investment risk with age, study finds

Retirement is a significant milestone, but transitioning to it requires careful financial planning. Retirees must consider factors like life expectancy, inflation, and recurring expenses to ensure their savings last throughout retirement. 

A study by Doug Waggle, professor of finance at the University of West Florida, and Pankaj Agrrawal, Nicolas M. Salgo Professor of Finance at the University of Maine, examined different investment strategies to determine the best approach for retirees. Their findings challenge the common advice to reduce risk over time.

Most financial advisers suggest retirees gradually shift from stocks to bonds. For example, they often recommend investing in stocks equal to “100 minus age,” meaning someone who is 100 would invest only in bonds. However, Waggle and Agrrawal’s study indicates that an increasing glide path, where the stock portion of a portfolio increases over time, could be more beneficial for retirees with guaranteed income like Social Security.

The study found that while a conservative strategy early on protects against large losses, retirees can afford to take on more risk as they age, given a clearer picture of their income needs. The inclusion of Social Security in a portfolio can also reduce reliance on investment income, allowing retirees to focus more on wealth-building. However, the study’s approach is not yet widely accepted among financial advisers.

Read the full story written by Erin Miller on the UMaine News website.

“Guaranteed Income and Optimal Retirement Glide Paths.” Waggle, Doug and Agrrawal, Pankaj.  Journal of Financial Planning, Vol 37 (6), pp. 74-94. 2024