Stunt Performers and Aging Investors: The Paradox of Risk
In cinema, finding stunt people over 55 is a rarity. Jackie Chan, the exception to the rule, still performs his own stunts despite nearing 65 years of age. It's no secret that the physical body becomes more fragile as one ages; even everyday activities can feel like high-risk maneuvers. As Clint Eastwood's body double aptly says, "The older you get, the harder the ground gets."
In a peculiar twist, though the physical risk aversion makes sense with aging, the same logic doesn't seem to apply to financial risk among older investors. Recent studies, like the one commissioned by MassMutual, show that pre-retirees and retirees today exhibit a surprisingly high degree of risk tolerance
. These individuals, often with decades of life experience, don't just want growth in their portfolios; they seem almost confident about their financial acumen and long-term goals, even in the face of market volatility.
Such attitudes towards risk among older populations are not isolated findings. The Federal Reserve's Survey of Consumer Finances also revealed that Americans aged 75 and over maintained their stock ownership levels while younger groups declined. Gallup's research further corroborated this, displaying a steady rate of stock ownership among upper-income, older Americans.
In contrast, younger generations, including Generation Z, display an acute aversion to financial risks. For them, financial security isn't merely a desire; it's a craving. Certificates of deposit (CDs) and savings accounts are more their speed, offering a reliable but low return on investment.
So, what's fueling this generational divide in risk tolerance? One hypothesis is that older individuals who are financially secure may be focusing on leaving a substantial legacy. However, this approach has an inherent danger, especially for those who rely on their investments for income. The risk is known as the sequence of returns risk
. This little-known but significant pitfall suggests the order in which you experience returns may significantly impact your financial stability in the long run. This is particularly relevant for retirees who might be withdrawing from their portfolios.
Thankfully, mitigating this risk is possible. A fixed index deferred annuity is positioned between the safety of CDs and the volatility of stocks. This financial instrument allows younger savers to accumulate funds without the detrimental effects of a negative stock market performance. Meanwhile, older individuals may generate consistent income based on the financial strength of the insurer issuing the annuity.
While physical caution may naturally increase with age, the same doesn't seem to hold for financial caution. Yet, navigating the financial markets requires a kind of stunt work, especially in one's later years. Asset preservation and income generation should be retirees' cornerstones of financial planning. Retirement should be about enjoying the fruits of one's labor rather than fretting over fluctuating portfolio values. As advisors, it's crucial to guide clients toward options like fixed index deferred annuities that offer a balanced approach to risk, especially in volatile markets.
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- Aging and Physical Risk: Older stunt people like Jackie Chan are rare, as physical risk tolerance naturally diminishes with age.
- Financial Risk Tolerance in Older Generations: Contrary to physical caution, older individuals often exhibit higher financial risk tolerance, as confirmed by MassMutual and Federal Reserve studies.
- Younger Generations Crave Safety: Generation Z and younger folks lean towards financial instruments offering security, like CDs and savings accounts.
- Sequence of Returns Risk: Older individuals withdrawing from their investment portfolios face a specific risk that could affect their long-term financial stability.
- Fixed Index Deferred Annuities: This financial instrument offers a balanced approach to risk, making it an excellent choice for both younger savers and older retirees.