More than 70% of senior retirement savers are holding an inappropriate percentage of stocks in their retirement accounts. That's according to a 2021 white paper from insurance company and retirement plan sponsor John Hancock.

The composition of your retirement accounts across asset classes (that is, stocks and bonds) heavily influences your portfolio's behavior over time. Hold too much stock and you face a higher risk of volatility. Hold too little and you'll see less movement in your portfolio balance, but also a lower level of growth.

For seniors, the right balance of assets should deliver moderate growth without excessive volatility.

This is because investment volatility is problematic in your senior years. Once you start taking retirement distributions, your ability to ride out market downturns is limited. Unless you have a huge amount of cash on hand, you're liquidating positions every time you pull money from your account. If the market's in a funk, those liquidations can cost you. You'll realize losses, lower your portfolio's future growth potential, and lose the opportunity to see recovery gains on those shares.

Senior woman checking her retirement account on laptop in her kitchen.

Image source: Getty Images.

Too much equity or not enough in retirement accounts

So, what is the right mix of stocks versus bonds for seniors, and where are seniors getting it wrong? The John Hancock report measures senior investors against a recommended allocation of 40% to 50% in stocks, with the rest in bonds or cash. Against that guideline, 38% of self-directed senior savers are invested too conservatively in their 401(k)s or defined contribution plans. These individuals can improve their investment performance by increasing their stock holdings.

Unfortunately, the opposite mistake is almost as common. Some 34% of senior savers have too much stock in their retirement portfolio. And these folks could see some unpleasant declines in their balance if the market hits a rough patch.

One size doesn't fit all

There are many theories on portfolio composition for seniors. You can see this for yourself by researching target-date funds (TDFs) and their glide paths. TDFs are mutual funds that gradually get more conservative over time by reducing their equity holdings. The glide path is the schedule that governs that progression.

For example, T. Rowe Price Group retirement funds hold 55% in stocks at retirement. That percentage continues to decline for 30 years until it reaches its low point of 37.5%. But BlackRock's LifePath Index Funds take a more conservative approach. These funds achieve their lowest equity exposure (40%) at retirement age.

You can see in the chart below how these two approaches deliver different types of performance. The T. Rowe Price fund grows faster than the BlackRock fund, but falls faster in downturns, too.

LIBKX Total Return Level Chart

LIBKX Total Return Level data by YCharts.

Optimizing your equity allocation

The right equity allocation for your portfolio depends on your situation and your risk tolerance. Maybe you have a nice pension, annuity payments, or some other supplemental retirement income. In that case, you could take the calculated risk of holding 50% to 55% in equities.

On the other hand, less risk and lower equity exposure are more appropriate if you're highly dependent on your income from that portfolio. In that scenario, you just can't afford to invest aggressively. Keep your equity holdings closer to that 40% level. You'll see more stability in your portfolio, and probably sleep better at night, too.