It’s a move you might sorely regret.
An old colleague of mine recently retired after a 40-something-year career. She’s excited for this next chapter of life but, like many people in her boat, is worried about the financial end of things.
Thankfully, she’s got nice savings. But when she told me she was planning to dump the entire stock portion of her portfolio, I was quick to tell her what a bad idea I thought that was.
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There’s a big misconception that stocks have no place in retirees’ portfolios once they’re at a stage where they’re tapping their nest eggs for income. But buying into that myth could cost you big time.
You can’t afford to dump all your stocks
It’s easy to see why you may be inclined to get rid of your stocks in retirement. Stocks can be very volatile. At a time when you need your portfolio for income, it can be daunting to see its value fluctuate in line with market changes.
It can also be very risky to keep too much of your savings in stocks once you’re retired. But on the flip side, it can be equally risky to leave yourself with no stocks in your portfolio whatsoever.
Without stocks, your portfolio might lose steam and gain minimal value during your senior years. That could translate to one of two things — running out of money sooner than expected or having to limit your retirement plan withdrawals from year to year, causing an income shortfall. Neither situation is ideal.
Consider this: For years, financial experts have recommended using the 4% rule to manage retirement savings. The rule has you withdraw 4% of your nest egg’s value in your first year of retirement and adjust subsequent withdrawals to account for inflation.
But the 4% rule assumes a fairly even mix of stocks and bonds. If you take stocks out of the equation completely, you may not be able to get away with taking out 4% of your savings each year. That might force you to live a more limited lifestyle.
It’s all about balance
I wouldn’t recommend keeping 75% of your portfolio in stocks as a retiree. And if 50% is a stretch for you, you don’t have to do that, either.
But you should absolutely keep some of your portfolio in stocks once your career comes to an end. This is what I told my former colleague, and I’d say it to anyone else with what will hopefully be a long retirement ahead of them.
Just as you can use stocks to fuel your savings’ growth while you’re in the accumulation stage of building wealth, so too can you use them to keep your portfolio growing — albeit perhaps at a slower pace — in retirement. You can take steps to minimize the risks involved by having a nice portion of your nest egg in bonds and keeping one to two years’ worth of cash on hand as well. If you do these things, you get a nice amount of protection without giving up the benefits stocks offer.
