Low Risk, Steady Income Are Retirement Priorities for Investors

Investors are willing to sacrifice higher investment returns in exchange for a steady income in retirement, according to Capital Group Companies Inc.’s “What Investors Want for Retirement” white paper, published Monday.

When offered a choice between lower risk with lower returns or higher risk with higher returns, 59% of investors said they preferred the less risky route. In a separate question, 60% said they valued generating a steady income more than reinvesting in search of increased value.

Preserving Savings

Capital Group’s research also found that investors wanted to preserve as much of their savings as possible, even if it meant accepting a lower level of retirement income. Only 20% of investors surveyed said they would risk losing more than 15% of their retirement nest eggs to pursue greater returns.

Investors aged 65 and older and those with more assets expressed a stronger preference for maintaining their savings and were more willing to trade withdrawal power to get it, according to the paper.

Meanwhile, respondents said their asset portfolios consisted of approximately 23% high-risk investments, 41% medium-risk investments and 35% low-risk investments. Retired investors reported having only 16% high, 50% medium and 34% low, the least risky portfolio among the surveyed pack.

‘Pragmatic’ Approach to Withdrawals

When asked about their sources of retirement income, investors expressed a strong preference for relying on dividends and interest (61%), rather than on capital gains (9%), preferences that rose five percentage points and dropped four percentage points, respectively, since the study was last conducted in 2022.

“But sometimes [investors] are willing to dip into their principal if they need to withdraw [so] much,” says Samir Mathur, a Capital Group solutions portfolio manager. The paper defined principal as “initial investment and subsequent contributions.”

Many retiree respondents (88%) said they were looking mostly to Social Security (46%) or employer- or government-sponsored savings accounts to supply the bulk of their retirement income. Contrastingly, investors with more time until retirement said they were planning to rely less on Social Security: 38% of investors with five or fewer years until retirement said they planned to rely on Social Security, while 31% of investors with at least six years until retirement planned to do the same.

Mathur says he thinks the respondents further from retirement are more “pragmatic” than respondents closer to retirement. They “don’t know what might happen to Social Security,” says Mathur, pointing to reports that Social Security trust funds will need to reduce benefits payments by 2034.

Withdrawals and Wealth

In considering withdrawal strategies, 47% of retirees and 31% of investors with at least $250,000 in assets were more likely to favor taking required minimum distributions than those near retirement (24%), investors with savings between $100,000 and $250,000 (18%), and those with less than $100,000 in assets (15%). The latter group said they would rely more on withdrawing a fixed amount.

“RMDs are taken depending on the requirement [to take them] and on an as-needed basis,” explains Mathur. “But people who had lower starting account values [preferred] a steady paycheck.”

Most investors’ withdrawals (41%) were targeted to cover basic expenses, followed by 18% toward planned expenses—including travel, living and their children’s weddings—and 17% toward emergencies. The paper cautioned that systematic withdrawals could become more important if inflationary pressures are sustained over an extended period.

Timelines

Additionally, when offered a choice between a 20-year and a 30-year withdrawal period, most of the surveyed investors felt 20 years was the appropriate time span for a retirement income investment strategy—despite 70% reporting they expect their savings will last longer than that.

Investors expressed a much larger preference for a withdrawal period of at least 20 years than they did in the 2022 survey, with positive responses increasing by 20 percentage points. The paper suggested the shift from a 20-year-or-less period to a longer period may be the result of higher bond yields or strong market performance, both of which make it easier for investors to generate sustainable income. Capital Group also reported that recent medical advances, such as the new class of weight loss drugs—glucagon-like peptide 1s—may have caused some investors and their spouses to plan for longer lifespans.

Mathur describes choosing a withdrawal period as a “trade-off.” An investor, asked about how long a drawdown period should be, is most likely to say, “as long as possible,” Mathur says. But most investors, asked about maximum risk tolerance, will say, “as low as possible.”

Capital Group posed similar questions to a group of financial advisers. When comparing the results of the two surveys, the firm found advisers were less risk-averse and preferred a longer time horizon for retirement planning than the investor group.

Specifically, more advisers were willing to tolerate a 30% decline in the account balances of their clients, while investors were only willing to tolerate a 15% loss. Most advisers preferred a 30-year withdrawal period, as opposed to the 20-year window many investors chose.

“When you ask an adviser, I think they are more realistic,” says Mathur. “It could be because advisers see a lot of individuals retire before they expect, often out of their control.”

The survey of 5,964 investors was conducted online by the firm Escalent on behalf of Capital Group from January 9 through February 5. Escalent conducted a separate survey of 611 financial advisers from January 9 through 27.