In a prior blog post, I debunked the myth that millennials were staying out of the stock market. That was good, but I came up with a new head-scratcher. Retirees are maintaining high equity allocations throughout retirement, and the allocations stay rather consistent. Why is this the case?

Data from Vanguard’s IRA investors show that equity exposure averages 60% at age 65 and remains about that level through retirement. For Roth IRAs, the averages are even higher. At age 65, the average equity allocation is roughly 75% and dips only slightly lower later in retirement.

Once again, I compared the asset allocations of Vanguard IRA investors with industry data, and the findings were more similar that not. For example, for retirees across the board aged 65 and older, equity allocations averaged around 70% in Roth IRAs[1] and 60% in traditional IRAs.[2]

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If you’re like me, you’ll likely notice the differences between IRA investors and Vanguard’s target-date glide path. Our glide path assumes that an investor retires at age 65, with a predetermined income replacement ratio (that varies by income level), and then systematically draws down his or her assets over a 30-year time horizon. We also assume that these goals can be met with a “success metric” of over 90%. While this is a foundationally sound framework, many retirees have other situations or goals and could result in a different target asset allocation. While I don’t know for sure what these situations are, investors may relate to these:

  • “I have more than one goal for retirement.” During retirement, retirees may have various goals that complicate investment decisions, ranging from managing the risks of not outliving their retirement portfolio to maximizing wealth transfer opportunities. And retirees have to consider factors such as market uncertainty, inflation, and increasing life expectancies.
  • “I want to spend from my portfolio (not spend down!).” Some retirees may tend to think of their portfolio as a personal endowment. They may focus on spending from their portfolio but don’t necessarily do so in a way that is intended to spend down the portfolio. As such, they may maintain a balanced portfolio, with the goal of preserving the real value of their assets.
  • “I don’t fuss about my asset allocation.” This can partially fall into the inertia bucket. We know that rebalancing is important to maintain the risk profile of a portfolio, but it’s also a behavioral challenge for many to “sell their winners to buy losers,” and stocks have been runaway winners since 2009. Layer in the fact that investors generally are worried about the looming threat of increasing interest rates, and they may not be very warm to the notion of rebalancing. Furthermore, some retirees may not revisit their asset allocation at retirement, or throughout, as circumstances change. This could potentially explain the flat stock allocation we see throughout retirement.
  • “It’s for my heirs, so I want it to grow.” More affluent retirees may be earmarking their IRAs for their children or grandchildren. Because RMDs from traditional IRAs can be stretched with younger beneficiaries, some IRA owners may tend to place assets with the highest return potential in their IRAs given the longer drawdown. This may be particularly true with Roth IRAs. Roth IRA owners aren’t subject to RMDs during their lifetime, and the assets pass income-tax-free to future generations. As a result, Roth IRAs are generally an optimal asset to designate for heirs.

While these are a few of my hypotheses to help explain why we see the more aggressive equity posture later in retirement, I’d be interested to hear from readers who are retired to help answer the “why.”

* Special thanks to my colleagues Steve Weber and Craig Gross for their research contributions.

[1] Holden, Sarah, and Daniel Schrass. 2015. “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2013.” ICI Research Report (July). Available at http://www.ici.org/pdf/rpt_15_ira_roth_investors.pdf

[2] Holden, Sarah, and Steven Bass. 2015. “The IRA Investor Profile: Traditional IRA Investors’ Activity 2007–2013.” ICI Research Report (July). Available at http://www.ici.org/pdf/rpt_15_ira_traditional.pdf