In his recent Advisor Perspectives article entitled, “Is It Still Worth Investing in Stocks?” Fellow actuary Joe Tomlinson outlines the potential positives and negatives for retired households of investing in stocks in today’s low-interest rate, high-stock valuation environment. He concludes that there are tradeoffs associated with taking stock market risk, and different households will “put different weights on the positives and negatives.” We suggest you read Mr. Tomlinson’s excellent article.
He describes the investing dilemma posed by the current investing environment, and his advice to financial advisors (and DIYers) is:
“Reacting to the prospect of a lower-than-historical investment returns and a lower risk premium from stock investing creates a dilemma for clients and advisors – whether to invest more heavily in stocks to increase expected cash flows and bequests or take a more defensive posture and reduce the equity allocation to hold down the negatives.
For practitioners, this analysis would need to focus on customized projections that reflect client specifics. For example, if a client has a solid base of lifetime income from Social Security and perhaps pensions or annuities, such income may be enough to cover basic living expenses and make it easier to tolerate a higher equity allocation for the investment portfolio. But if a client has more limited lifetime income sources, the negatives discussed above will loom larger, and the best approach might be to use a lower stock allocation. It may also be worth exploring delaying Social Security and other options such as an annuity (e.g., a SPIA) or setting up a reverse mortgage to provide more secure lifetime cash flow and reduce potential damage from poor investment performance.”
We agree with Mr. Tomlinson and remind our readers that they (and their financial advisors) can relatively easily perform the necessary analysis described above using our one-tab Actuarial Financial Planners.
