Here’s What Happens When You Stop Investing in Stocks Completely During Retirement

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You don’t want to go too heavy on stocks as a retiree. But read on to see why going to the opposite extreme isn’t a great idea, either. 

Workers are often encouraged to invest heavily in stocks when retirement is many years away. Even though stocks can be volatile, they tend to generate pretty strong returns. (The S&P 500 has averaged 10% returns annually over the past 50 years, which is pretty impressive.) So it’s worth taking on that risk at a time when retirement is far off to enjoy that growth in your portfolio while you can.

You’ll often hear that it’s a good idea to move away from stocks as retirement nears and shift to safer investments, like bonds. And that’s good advice.

Let’s say you were to keep 100% of your IRA in stocks as a retiree. What if the stock market were to crash, driving the value of your portfolio down by 20%? If, at that point, you needed to take withdrawals to cover your living expenses, you’d automatically lock in a 20% loss every time you cashed out an investment. That wouldn’t be good.

On the other hand, you don’t want to go to the extreme of not having any stocks in your portfolio as a retiree. If you dump your stocks completely, you might stunt your savings’ growth during your senior years. And that might mean having to limit your withdrawals to avoid running out of money.

You need some stocks during retirement

It’s important to withdraw from your retirement savings strategically so that money lasts throughout your senior years. And for a long time, financial experts felt that withdrawing from savings at a rate of 4% a year was reasonable.

Now at this point, that 4% rate is a bit questionable due to changes in market conditions (namely, bonds aren’t paying as generously as they did when this guidance was established, so that’s a reason to go with a more conservative withdrawal rate than 4%). But even so, it hinges on having a portfolio that consists of 60% stocks and 40% bonds. If you have none of your assets in stocks during retirement, you’ll have to stick to a much lower withdrawal rate, thereby limiting your income.

So, let’s say you manage to retire with a $1 million nest egg that’s 60% stocks and 40% bonds. If you opt for a 4% withdrawal rate, you’ll get $40,000 of annual income out of your savings.

But if you have no stocks in your portfolio, it means your money won’t grow as much in retirement. And as such, you may have to limit yourself to a 1% or 2% withdrawal rate, leaving you with just $10,000 to $20,000 of annual income. That’s less ideal than $40,000.

It’s all about striking a balance

You don’t want to keep too large a percentage of your portfolio in stocks as a retiree, as doing so means taking on a lot of risk. Rather, it’s good to strike a balance between stocks and bonds.

You could go with the 60%-40% split the 4% rule assumes. Or, you could use the rule of 110, which has you subtracting your age from 110 to see what percentage of your portfolio should sit in stocks. If you’re 65, you’d have 45% of your assets in stocks and the rest in bonds.

Of course, there are other allocations you can play around with, too. The point, however, is to not go to the extreme of getting rid of stocks when retirement rolls around. You need those stocks to continue generating growth so you have access to a robust income stream that helps you cover your expenses without worry.

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