Equities (stocks) represent ownership shares in publicly traded companies. They offer the highest historical long-term returns (~10% nominal, ~7% real) but with the greatest short-term volatility. For retirees, equities are the primary engine for outpacing inflation over a multi-decade retirement.
Equities, commonly called stocks, represent fractional ownership of publicly traded companies. When you buy shares of a company or a stock index fund, you own a piece of the business and participate in its profits (through dividends and price appreciation) and its risks (through price declines). In retirement portfolios, equities serve as the growth engine that combats inflation risk and longevity risk.
How It Works
Equity returns come from two sources:
- Capital appreciation: The stock price increases over time as the company grows
- Dividends: Regular cash payments from company profits to shareholders
Historical performance (U.S. large-cap, annualized):
| Metric | Value |
|---|---|
| Average nominal return | ~10% |
| Average real return | ~7% |
| Standard deviation | ~16% |
| Worst single year | -37% (2008) |
| Best single year | +53% (1954) |
| Worst 10-year real return | -4.9% annually (1999–2009) |
| Best 10-year real return | +16.6% annually (1949–1959) |
The wide range of outcomes is the defining characteristic: in any given year, stocks can gain or lose 20%+. Over 20+ year periods, they have historically always delivered positive real returns — but "historically" comes with no guarantee for the future.
Why It Matters for Retirement Planning
Equities play a dual role in retirement portfolios:
The case for stocks: Without equity exposure, a retirement portfolio may not generate enough growth to sustain 30 years of inflation-adjusted withdrawals. Bonds alone often fail to keep pace with inflation after accounting for withdrawals. A retiree needs growth assets to prevent their portfolio from being slowly consumed.
The case against too much: High equity allocations amplify sequence-of-returns risk and drawdowns. A 90% stock portfolio that drops 40% in the first year of retirement may never recover, especially with ongoing withdrawals. Diversification across stocks and bonds reduces this vulnerability.
The sweet spot for most retirees falls between 40% and 70% equities, depending on other income sources, risk tolerance, and retirement duration. Monte Carlo simulation helps identify the allocation that balances growth needs against drawdown risk for each individual situation.
A Practical Example
A 65-year-old retiree with $1,000,000 compares three allocations over 30 years with $40,000/year withdrawals:
| Allocation | 30-Year Success Rate | Median Portfolio at Year 30 | Maximum Drawdown |
|---|---|---|---|
| 30% stocks / 70% bonds | ~78% | $280,000 | -18% |
| 60% stocks / 40% bonds | ~92% | $720,000 | -30% |
| 90% stocks / 10% bonds | ~89% | $1,100,000 | -45% |
The 60/40 portfolio has the best balance — higher success rate than the conservative portfolio (more growth) and higher than the aggressive portfolio (less drawdown risk). The 90/10 portfolio has a higher median outcome but a slightly lower success rate because its worst-case scenarios are worse.
Frequently Asked Questions
- How much of my retirement portfolio should be in stocks?
- There's no universal answer, but common guidelines include '110 minus your age' in stocks (e.g., 40% stocks at age 70). Research suggests even retirees benefit from 40-60% equity exposure to combat inflation and longevity risk. The right allocation depends on your other income sources, risk tolerance, and retirement time horizon.
- Are stocks too risky for retirees?
- Stocks are volatile in the short term but essential for long-term purchasing power. A 30-year retirement needs growth to outpace inflation and support withdrawals. The risk isn't in holding stocks — it's in holding too much or too little relative to your time horizon and withdrawal needs. Proper asset allocation and dynamic spending strategies manage the risk.
- Should retirees invest in individual stocks or index funds?
- Index funds are strongly preferred for retirement portfolios. They provide broad diversification, low fees, and eliminate the risk of individual company failure. A single low-cost total market index fund provides exposure to thousands of companies, achieving maximum diversification with minimal effort.