Many participants aren’t aware of the exact effects of sequence-of-return risk, but the fear associated with a steep loss just prior to, or early in, retirement is something most innately understand.
Yet, even though they say they worry about such a retirement “derailment,” many nonetheless pursue aggressive investment strategies as they approach the exit.
The MassMutual Retirement Savings Risk Study found that 94 percent of pre-retirees and 92 percent of retirees “strongly agree” or “somewhat agree” that it is important to take steps to avoid major stock market losses right before retirement.
One in two pre-retirees (49 percent) and one in three retirees (32 percent) are apprehensive about taking too much investment risk, the company finds.
Growth Over Preservation
Meanwhile, the study finds that many retirees and pre-retirees are more focused on growing rather than preserving their assets:
- 59 percent of pre-retirees and 32 percent of retirees describe their primary investment strategy as focused on either “aggressive growth” or “moderate growth.”
- 32 percent of pre-retirees and 49 percent of retirees characterize their investment mix as a balance between growing and preserving their savings.
- Pre-retirees are most likely to predict that their investments will be focused primarily on preservation rather than growth when they retire while retirees are less likely to actually adopt that strategy.
- Guaranteed income either through a pension or annuity makes a difference. Although they report similar risk tolerances, study respondents with a source of guaranteed income were more likely to focus on growing their assets just before and into retirement than those without guaranteed income.
Few retirees wish they had been more conservative just before retirement, said Tina Wilson, head of MassMutual’s Investment Solutions Innovation, a sentiment that may have been colored by one of the longest bull markets on record.
Fifty-eight percent of retirees say they would employ the same investment strategy just before retirement and 35 percent say they would have invested either “much more” or “somewhat more” aggressively if they could alter past decisions, the study finds.
Recommending Caution
Financial advisors, on the other hand, generally caution retirees and pre-retirees against taking too much investment risk. Study respondents who worked with an advisor (46 percent of pre-retirees; 57 percent of retirees) say their advisor recommends they change their investment strategy. Of that group, 73 percent of pre-retirees and 88 percent of retirees report that their advisor recommends that they invest more conservatively.
Strategies for Consideration
More widespread adoption of managed investment strategies such as target date funds (TDFs) or customized investments where a professional money manager automatically shifts assets to more conservative investments as an investor nears or lives in retirement may be helpful for some people, according to Wilson.
However, TDFs were introduced in the early 1990s, long after many study respondents started saving for retirement, which may be one reason why the adoption of those strategies among these retirees and pre-retirees appears to be relatively low among study respondents.
For instance, 29 percent of pre-retirees and 20 percent of retirees indicate they currently invest in TDFs (or invested in TDFs at the time they retired), the study finds. Twenty percent of both groups are unsure.
Yet many respondents indicate that TDFs might be beneficial, especially if an investor lacks the discipline or time to adjust his or her investments. Sixty-six percent of pre-retirees and 44 percent of retirees agree that TDFs would help.