Is a 90% Stock Allocation Too Aggressive for Retirees?

It would be hard to find a podcast-hosting duo more fully invested in answering your financial questions than Alison Southwick and Robert Brokamp -- they even put "Answers" in their show's name! This week, they're at it again, combing through the Motley Fool Answers mailbag in search of conundrums to address for their listeners. But because three heads are better than two, for this episode, they have recruited senior analyst -- and frequent podcast guest -- Ron Gross to help out.

In this segment, they field a query from Ross, whose parents are planning to retire in the relatively near future and intend to allocate their portfolio 90% to stocks, with the rest in cash. Strictly on a percentage basis, that strikes him as overly risky for a retirement allocation, but he wants some expert opinions -- and that's what he gets.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 25, 2019.

Alison Southwick: We're going to get our question from Ross. "My parents are retiring in a few years and they plan on retiring with a 90/10 split of stocks and cash, with the cash covering about two years of expenses. Should I try harder to get my parents to change their allocation? Is the two years of cash enough to meaningfully offset stock market drops relative to a traditional split?"

Robert Brokamp: Ross, I'll start with the guidance we provide in Rule Your Retirement, and that is for the retiree portfolio, it's that classic 60% stocks, 40% bonds split. We also talk about an income cushion of three to five years of portfolio-provided income outside of the stock market in cash or term bonds because, historically, bear markets last about three years from peak to trough to peak again, though there are many that last longer. So three to five years out of the stock market, I think, is a start. So yes, your gut reaction that maybe your parents are being too aggressive makes sense to some degree.

That said, there are situations when it's OK to be more aggressive with your portfolio. Maybe they have a pension. Maybe they have business income. Maybe they have rental property. So they have other sources of income that they can rely on that will allow them to be a little bit more aggressive in their portfolios.

If you look at the safe withdrawal rate research, it definitely indicates that the optimal stock allocation is between 50% and 70%. Maybe 75% is high, but it's actually not quite as dire if you go higher than that, and we'll talk about why and I'll give you an example.

In 2013 Warren Buffett, in his annual letter, said that he's directed in his will that when he passes on, his wife's portfolio will be 90% S&P 500, 10% short-term bonds. Now, on the one hand, of course, whatever she's going to inherit -- he didn't say how much -- but it's probably in the tens of millions...

Ron Gross: I would think that's fair.

Southwick: It's enough.

Brokamp: ...so when you have that much money, when the market drops 50% you're probably OK; but in 2015 an economist, Javier Estrada, took a look at this and said, "OK, this is Buffett's advice. How would that have worked out over the 30-year period starting in 1900 -- so every 30-year period -- all the way up through the period ending 2014?" 90% stocks, 10% bonds. A 4% withdrawal rate. Withdrawals are coming proportionately from the stocks and the bonds, 90%, 10%, and then rebalanced annually. In how many 30-year periods did that person run out of money? Only 2.3% of the time.

Gross: That's nice!

Brokamp: So it's actually not quite as risky as you might think. That said, in 10% of the time, this retiree was getting close to having only 20% left of their portfolio. So it's still pretty risky, but he came up with two other tweaks to it. One was when you take out a withdrawal, any time the stock market is up, you take it from stocks. If it's down you take it from the bonds. The other tweak was whatever is outperforming you take the money from. So if stocks do better than bonds, you take it from stocks. If bonds are better, you take it from bonds. What did that do? It actually increased the upside potential and downside protection, so it was even safer.

The bottom line is while I think that for most retirees having 90% in the stock market is too aggressive, I would just talk to your parents and ask what's going to happen if we have another decade like we had the first decade of this century, where we had two significant bear markets, and over the whole 10-year period stocks lost money. Do they have a backup plan? Talk to them about that. But as long as the future looks vaguely like the past, it's actually not as risky as we might think.

Gross: May I ask a question? I know I'm the new guy. Is that allowed?

Brokamp: Sure!

Southwick: Yes, I'll allow it!

Gross: Is it fair to say that once you reach a certain age -- let's say you're in your 90s -- that you can start to think of it no longer as your portfolio but the portfolio of your heirs and if your heirs are 40 or 50 years old, then 90% stocks for those folks may be perfectly appropriate?

Brokamp: Yes, absolutely! There's some research that came out maybe four or five years ago by Wade Pfau, who's been on our show, and Michael Kitces, and they found that it actually makes sense to reduce your stock allocation right around retirement, but as you get older to increase your stock allocation largely because of that. In the end, most of the money that you have is going to be left to your heirs.