Should I Invest in Stocks During My Retirement?

January 18, 2017 — 6:00 AM EST

Plenty of financial gurus have written about retirement planning – everything you should do before you retire. However, when you reach retirement age that advice becomes a little harder to come by. Once you start relying on your retirement savings for income, how do you invest your money going forward? More specifically, should stocks be a part of your retirement portfolio? 

The Conventional Wisdom

For the most part this isn’t a yes or no question; it’s a question of how much. The conventional wisdom is to subtract your age from 100 to determine your stock allocation. If you’re 70 years old, the percentage of stocks in your portfolio should be around 30%. Not surprisingly, there are plenty of people who don’t agree. 

“I’ve never been a big fan of one-size-fits-all recommendations,” says David S. Hunter, CFP®, president of Horizons Wealth Management, Inc., in Asheville, N.C. “This rule simply ignores two very key factors: 1) How much return does a retiree need to live comfortably during retirement? 2) What is the individual's risk tolerance? Either or both being left out of the equation can lead to disaster further down the road.”

(For more, see Is ‘100 Minus Your Age’ Outdated? and  Risks of Too Many Stocks in Your Retirement Plan.)

Where’s My Interest?

The problem is the low-interest-rate environment of the current economy. Those close to – or already in – retirement remember the mid-1980s, when certificates of deposit yielded more than 11% on a one-year CD. Back then, ultra-safe investments such as CDs and Treasuries allowed older investors to protect their money from the uncertainties of the stock market because these investments paid such great rates of return.

As of early 2017 that same one-year CD pays 1.30% – nowhere near enough to build wealth or even beat inflation. In other words, inflation is causing the value of your dollars to drop faster than the money you’re earning through these cash-equivalent investments. It’s this problem that has forced current retirees to embrace more risk in their portfolio. (For more, see Popular Retirement Portfolio Stocks.)

“In the past, retirees were able to safely invest into very conservative investments – such as CDs, money markets and savings – that would pay a decent interest rate. With low interest rates today, many will have to absorb some sort of risk just to keep up with inflation,” says Carlos Dias Jr., founder and wealth manager, Excel Tax & Wealth Group in Lake Mary, Fla.

Sequence-of-Returns Risk

If you’re the academic type, you might want to read up on sequence-of-returns risk, also known as sequence risk. In the most basic sense, it’s the risk of having the stock market be at a low point when an individual (a retiree, for example) is making the first withdrawals from investments, resulting in lasting damage to his or her portfolio. One way this happens: Retirees get scared and withdraw all their money from the market. This means they sell low, then further lose out when the market recovers and they have no assets already in the market to benefit from the recovery.  Another way: Retirees supported by investments make a planned cash withdrawal in a bad market and thus have to sell more stock to achieve that cash goal than they would need to if the market were higher. Again, these withdrawals make their portfolio smaller from then on, leaving them with fewer assets left to benefit from higher returns after the market recovers.

There’s not much you can do to control sequence risk other than, perhaps, to try to time your retirement for a period when the stock market is strong. Needless to say, that's not always possible. Retirees living on their savings and investments should have a stock allocation low enough to keep them from panicking when the market drops, but high enough that they have money that can continue to work hard enough during good market times to support them now that they can no longer work. 

So What Should You Do?

Some experts say that once you reach retirement, you should have no more than 40% of your assets in the stock market, while others recommend as low as a 5% allocation. That’s not overly helpful to the average investor seeking guidance.

Of course, not all stocks are created equal. Some are far more volatile than others, and some pay a healthy dividend. If you prefer mutual funds or ETFs to individual stocks, there are funds built around “safe stocks” (as much as that concept exists) that minimize the reaction to negative market conditions.

Second, don’t view the bond market as safe and the stock market as risky. Some retirees have taken to higher-risk bonds and bond funds to make up for the growth they aren’t getting in the safer bond options. This is a dangerous way to invest; the risk of default is high. Assigning a general weighting to stocks might be a good guide, but it’s more important to have a stock portfolio appropriate to your financial situation.

“It’s really important that retirees stay diversified during retirement,” says Craig L. Israelsen, Ph.D., designer of 7Twelve Portfolio in Springville, Utah. “They need a portfolio with stocks (both U.S. and non-U.S. stock funds), diversifiers (such as real estate funds and commodities funds) and fixed income funds (bonds, TIPS, non-U.S. bonds and cash). Diversification is a natural defense against the risks inherent in a bad sequence of returns in the early years of retirement.”

Ask About “Insurance”

Look into the portfolio-management strategy called hedging. Hedging is a way of insuring your portfolio against downside risk by purchasing put options against assets. Put options gain value when the underlying asset falls. This is an advanced strategy not appropriate for the average investor, but a retiree should ask his or her portfolio manager whether this would make sense to protect a portfolio weighted more heavily to stocks than is optimum for a retiree.

“Hedging comes at a cost,” says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass., “but it can really provide additional opportunities for a retiree who is concerned about a volatile market. Unless you are experienced at proper hedging strategies, you might want to consider asking a financial advisor to help hedge your portfolio.”

The Bottom Line

As with everything in investment-portfolio management, your financial situation and personal risk tolerance will dictate the amount of stock you should have in your retirement portfolio. Find someone you trust (see How to Find a New Financial Advisor Who's Right for You and  How Do I Know I Can Trust My Financial Advisor?) and ask about your ideal allocation.