Retiring? Here’s Why You Don’t Want to Dump Your Stocks

If you’re nearing retirement, you may be gearing up for some big changes. Those could include downsizing your home, relocating to a different part of the country, and going from working 40 hours a week to not having to work at all.

You may be inclined to make changes in your portfolio as retirement nears as well. And that’s a good thing.

You can afford to take on more risk in your IRA or 401(k) plan when retirement is many years away. But as that milestone inches closer, it’s a good idea to shift toward more conservative investments, like bonds.

Since the start of the year, the stock market has taken investors on a wild ride — one most people would’ve preferred to skip. And so if you’re on the cusp of retiring, keeping a huge portion of your portfolio in stocks is a pretty risky prospect.

But that doesn’t mean you should dump your stocks entirely as your career wraps up. And if you go that route, you might sorely regret it.

You still need stocks to generate growth

The logic in shifting over to bonds as retirement nears, or once you’re in retirement, is simple. At that point, there’s a good chance you’ll be tapping your portfolio regularly and living off of your savings. And so you can’t risk a scenario where your portfolio value drops 30% over a two-month period due to a stock market crash.

But while it’s a good idea to reduce your stock holdings as retirement approaches, you should still keep a decent chunk of your portfolio in stocks. The reason? You need those stocks to keep generating growth in your nest egg.

If you’re close to retirement, you may have heard of the 4% rule, which states that if you start off by withdrawing 4% of your savings balance your first year of retirement and adjust subsequent withdrawals for inflation, your nest egg should last a good 30 years. For many seniors, that will be enough to cover them for the entirety of their retirement.

But to make that 4% withdrawal rate possible, your investments need to keep working for you. And if you get rid of your stocks completely, you probably won’t generate enough growth in your portfolio to sustain a 4% withdrawal rate. (Incidentally, many believe that the 4% rule is now outdated — but that’s a different discussion.)

Go easy on stocks, but don’t let go of them completely

The percentage of your portfolio you keep in stocks during retirement should hinge on different factors, including your various income sources and tolerance for risk. But for the most part, you probably don’t want more than 60% of your assets in stocks once you’re retired. And you probably don’t want less than 30%. So from there, you can look at your personal financial picture to determine where you land.

Remember, too, that stocks have the potential to generate dividend income for you. And that could end up being a very useful thing once you’re no longer earning a paycheck from a job.

The $18,984 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.