Retirees Are Too Pessimistic on Their Investments—And It's Costing Them

Growing old and cranky is a cliché that rings less true every time Jane Fonda walks on the set or Danny DeVito appears in a new movie. But even with healthy aging, we must fight the impulse to lose hope. Nowhere is that more clear than in our investments.

Adults in retirement are less optimistic than younger groups about future economic growth, stock-market returns and long-term personal financial well-being, new research shows. This may lead them to shift out of stocks too soon and cut spending more than needed, shortchanging their lifestyle and dreams.

Every year between 2001 and 2014 those ages 65 and older, on average, said the stock market had a less than even chance of rising over the next 12 months. Younger cohorts consistently had more faith, according to a study from United Income, a company developing money-management services for older Americans. For the record, stocks rose in all but two of those years. If these older adults didn't invest in stocks at all, they would have missed the brutal decline of 2008. But they would also have missed a near doubling in stock prices over the entire period.

"The benefits of longer lives and retirement may be curbed if older households become overly cautious about investing and spending as they age," writes United Income founder Matt Fellowes, a former Morningstar executive. For the report, he studied two series of survey data from the University of Michigan.

Adults over age 64 are 40% more skeptical about their future financial health and 30% more skeptical about future economic growth than those under age 35, the report finds. Yet this growing pessimism with age appears to be unfounded. One indication is the size of the estates people leave behind when they die: Retired adults who pass away in their 60s, on average, leave behind $296,000 in net wealth; in their 70s, $313,000; and in their 80s, $315,000.

Those who live into their 90s still leave behind an average $238,000, the report finds. The clear implication is that older adults worry too much about their money. That may be one reason that spending falls off as retirees age, the study says.

Age-induced crankiness is not the sole culprit. Blame mounting uncertainty, which comes with dramatically longer life spans. Longevity has complicated everything about retirement. Traditional pensions may be underfunded or have been disbanded. Without this safety net, and with no way to know how long you will live, caution—not gloom—is higher.

Overly conservative portfolios then become a self-fulfilling prophecy of future economic struggles. Over periods of 20 years or longer, by playing it too safe and shunning stocks in favor of low-yielding investments, individuals lose buying power—and eventually their lifestyle.

This bell has been rung before. Economist Lawrence Kotlikoff at Boston University has argued for a decade that individuals are saving too much, and shortchanging their lifestyle. He believes common rules of thumb like needing 80% of pre-retirement income overstate the need and that the financial industry steers folks this way to scrape fees off the stockpile of invested dollars.

In retirement, you may need to replace as little as 35% of your former salary if you have paid off the mortgage, shed all child-care and employment costs, and no longer need to save, argues Fred Vettese, chief actuary at Morneau Shepell, a Canadian consulting firm. Kotlikoff says the common wisdom to save early and often fails to recognize the difficulty of doing so while young and burdened with expenses—as compared to the relative ease of putting something away in higher-earning years when you have fewer expenses.

The United Income report echoes these thoughts, though it does not suggest adults are saving too much in their working years—only that they are spending too little in retirement, possibly due to unfounded worries over their future finances.

No one is suggesting retirees cut loose irresponsibly. But they may not need to limit spending as much as they think. The key is sticking with growth investments through at least the first part of retirement. Holding 40% of your portfolio in stocks at age 70 is a reasonable target. You did the hard part by saving. Don’t shortchange yourself now by worrying the market may fall and not get up again.