On average, consumers hold less than one-half of their assets in stocks, stock mutual funds, and exchange-traded funds (ETFs), according to the report “Protection, Growth and Income” based on a study conducted on behalf of the Insured Retirement Institute and AXA Financial.
Those who have a low tolerance for investment risk have an average of 37% allocated to stocks. For true conservative investors (those with low risk tolerance and 25% or less of their investable assets allocated to stocks), the fear of losing money in the stock market (approximately 80% of respondents) and lack of trust in the stock market for money they are counting on in retirement (approximately 70%) are the most often cited reasons for allocating less of their portfolios to stocks. “Unfortunately, under-allocating to stocks can hamper progress toward financial and retirement goals, resulting in lower retirement income and financial resources that are inadequate for managing financial risks, such as health care shocks and inflation, during retirement,” the report notes.
Among conservative investors, 66% prefer investments with a certain return as compared to the possibility of achieving a higher return that is uncertain, and 83% say that not losing principal is extremely or very important. Further, 59% of conservative investors are not comfortable with their current stock allocation of 25% or less of their portfolios, despite 73% being concerned that they will not have enough income to last throughout retirement.
The study found consumers are generally concerned about the ability of their savings to withstand retirement and pre-retirement risks. About one-half of those with low risk tolerance and low allocation to stocks are very or extremely concerned that the stock market will endure a significant correction just as they are ready to retire. Despite the lower likelihood that these conservative investors will be significantly impacted by such a drop due to their limited allocation to stocks, this fear is a significant factor contributing to that limited exposure.
At the same time, seven in 10 conservative investors are at least somewhat concerned they will run out of money before they die. More than half of these investors are very or extremely concerned of this possibility. “Ironically, very low allocation to growth assets like stocks can increase the probability of this occurring, particularly in inflationary environments when more conservative investments, such as cash and short-term bonds, fail to keep up with increasing income needs,” the report points out.
Consumers are also worried about inflation, with 92% recognizing that inflation is likely to have an impact on their expenses during retirement. But with only 26% stating they are extremely or very concerned about inflation, there may not be a clear understanding of how devastating the effects of inflation can be, particularly among the risk averse. The report states that at just 2% annual inflation, the purchasing power of a dollar is cut by 49% over 20 years.
Health care costs are also a concern, as six in 10 consumers believe they are only somewhat prepared, or not well prepared, to deal financially with a major health event.
A common thread running through these risks and fears is ultimately the fear of not having saved enough to create sustainable, lifetime income, and to weather financial storms.
The report suggests, “The need to maintain a sufficient allocation to stocks can be reconciled with the reticence to do so of the risk averse investor by moving a portion of the retirement portfolio into structured annuities and/or annuities with guaranteed lifetime income or withdrawal features. This increases the growth potential of retirement assets and income, while providing a measure of protection against the downside risk and volatility of stock-based investments. Risk averse investors who are not invested in stocks to the extent needed to achieve their financial goals should be introduced to these products during the planning process.”
The study found eight in 10 consumers find annuities relatively easy to understand, and a similar number find them to be appealing. The appeal is understandable, as more than nine in 10 of these consumers believe it is important to minimize the risk of losing principal.
For advisers, 59% of those surveyed say they use advisers and 78% indicate their advisers discuss risk tolerance, although only 50% say they discuss guaranteed lifetime income with their advisers, and only 18% have worked with their advisers to estimate retirement health care costs.
The study found of 56% consumers are extremely or very confident in their advisors if guaranteed lifetime income is discussed.
The consumer survey consisted of 15-minute online interviews with 1,005 consumers ages 50 to 75, using the Research Now online panel. Fielding of the survey took place from December 5 to December 11, 2017. The study report may be downloaded from https://us.axa.com/retirement/iri/#full%20report.