Is It Ever Smart to Ditch All Stocks in Retirement?
You've heard the rule: "You need stocks to fight inflation." But financial experts say there are three scenarios where a 0% stock portfolio may be your safest bet in retirement.
When you're building wealth for retirement, it's often advisable to go heavy on stocks so your money can grow. But as retirement nears, it's common to reduce your exposure to stocks and shift more of your assets into bonds for stability and predictable income.
There's no single "optimal" allocation between stocks and bonds to aim for in retirement. The famous 4% rule for retirement withdrawals assumes a fairly equal stock/bond split, but there's wiggle room in that formula.
That sort of split doesn't work for everyone, though. Recent findings from Fidelity show that 38% of retirement savers ages 65 to 69 may have a higher stock allocation than what's typically recommended. The same holds true for 50% of savers 70 and over.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
On the flipside, T. Rowe Price, in collaboration with MIT Sloan and Stanford, found last year that 10% of retirement savers prefer to avoid stocks completely.
Of course, the reason why financial experts might advise against that is clear. Retirement can last for decades, during which time inflation can easily erode purchasing power. Stocks have historically beaten inflation over the long term. And dumping stocks completely could mean losing buying power through the years.
But that doesn't mean ditching stocks completely isn't reasonable for some retirees. There are certain scenarios where a stock-free portfolio can get the job done.
1. When you have enough guaranteed income to cover your costs
Getting rid of stocks in your portfolio may stunt its growth during retirement. But that's not necessarily a terrible thing if you don't need your portfolio to cover your expenses and would rather have the peace of mind.
"This strategy could be good for someone who is looking for very low risk," says Joel V. Russo, Founder and Principal at NJ Retirement Planning, LLC. "After years of owning and riding the highs and lows of the stock market, retirement sometimes sets the tone for leaving that risk of loss behind."
As Russo explains, if your fixed income, Social Security, and/or pension cover all of your overhead, then the risk of owning stocks may not be worth it. And if more income is needed, he says, products like annuities could help bridge the gap.
Scott Schuebel, CEO and Managing Partner at Statera Advisors, agrees.
"Ironically, the retirees who can often afford to take the most investment risk are often the ones whose essential expenses are already covered by predictable income," he says. "Because they aren't relying on their portfolio to pay next month's bills, they can be more patient during market downturns and give their investments time to recover."
That said, people whose expenses are covered do not need to take on the risk of holding stocks in retirement if they don't have the appetite for it.
"If market volatility causes someone to panic and make poor decisions, a more conservative portfolio may actually produce better real-world outcomes even if the expected return is lower," Schuebel insists.
2. When you have a giant pool of money to work with
In June, Fidelity reported that the average 401(k) balance was $258,800 among savers 65 to 69 and $264,000 among those 70 and over. (Keep in mind that average balances are inflated by the very wealthy.)
With a smaller nest egg, ditching stocks becomes harder. But Diana Richey, JD and CFP, says that with a large enough savings balance, avoiding stocks is less of a problem.
"For a couple in their 70s with, say, $8 million, $200,000 in annual spending, and health concerns, it can be perfectly reasonable to avoid stocks," Richey says. "At a 4% yield, the portfolio could generate about $320,000 a year before taxes — more than enough to cover their current spending and provide a cushion for inflation and potentially long-term care."
Richey insists that someone with a large asset base does not need to take stock market risk they can afford to avoid.
"A diversified portfolio of high-quality bonds and cash could protect principal, reduce stress, and preserve assets for heirs," she says. "If the goal is security rather than maximum return, skipping stocks can make sense."
3. When you have health issues
Russo points out that health concerns are another reason to consider dumping stocks completely.
"Maybe you're unhealthy or [expect] a shorter retirement than normal," he says. In that case, it pays to look at investments and vehicles that can provide income for a shorter period of time.
Schuebel agrees.
"If a retiree has a serious medical condition and their planning horizon is measured in just a few years rather than decades, preserving capital and ensuring liquidity often become more important than long-term growth. At that point, the purpose of the portfolio changes," he says.
Of course, just because you have health issues and are more focused on short-term needs doesn't mean you don't have a spouse to think about. But in that situation, rather than turn to the stock market, you could try locking in more guaranteed income.
Delaying a Social Security claim until age 70, for example, may result in a smaller lifetime benefit for you if you have health issues. But it could leave your spouse with a more robust survivor benefit.
Stocks may not be as "unsafe" as you think
There are clearly some use cases for ditching stocks entirely in retirement. But before you do, consider that with a well-diversified portfolio and cash cushion, keeping a portion of your portfolio in the stock market may not be the risky move you think it is. And by avoiding stocks, you take on a different type of risk—losing out on buying power over time.
As Russo says, "If a long retirement is in your future, keeping pace with inflation could be tough with just safe investments."
With a long horizon, keeping even a small amount of money in stocks could put you in a stronger financial position later in life.
"Retirement could last nearly 30 years," Russo says. "You could actually find you’ve lost out on opportunity costs by not participating in a long bull market run."
Read More
