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Strategies for a successful retirement

Why Retirees Still Need Stocks: Protecting Your Nest Egg for the Long Haul

Many retirees believe that pulling all their money out of the stock market and moving it into cash or bonds is the safest way to guard their savings. But this strategy, while comforting in the short term, can backfire in the long run.

According to retirement experts, keeping some exposure to stocks is essential—even in retirement—because the biggest risk isn’t market volatility; it’s running out of money.

The Real Risk: Living Longer Than Your Savings

Experts warn that longevity is the most serious financial challenge facing retirees.

As life expectancies rise—currently averaging 78.4 years in the U.S.—retirement may stretch across three decades or more. And with the number of centenarians projected to quadruple in the coming decades, portfolios need to grow to keep pace.

While cash and bonds are less volatile and help soften the blow of market swings, reducing exposure to stocks too much can make it difficult to keep up with inflation and long-term expenses. Historically, stocks have delivered average annual returns around 10%, far outpacing the roughly 5% average return from bonds.

We cannot decline that equities are the growth engine of a retirement portfolio, and scaling them back too much can increase the risk of outliving your money.

Finding the Right Balance

So, how much stock exposure is right? A commonly used rule of thumb is to subtract your age from 110 or 120 to find your ideal stock allocation.

For a 65-year-old, that would translate to around 45% to 55% in stocks, with the remainder in bonds and a small allocation in cash.

T. Rowe Price planners Judith Ward and Roger Young suggest that retirees in their 60s might consider holding 45% to 65% in stocks, 30% to 50% in bonds, and 0% to 10% in cash.

For those in their 70s or older, stock exposure might drop to 30% to 50%, with increased allocations to bonds and possibly more cash for flexibility.

However, these are starting points—not hard rules. Also, this depends on not just the money you will need to retire but also the money you have to invest.

Someone with $5 million may not have to put a large percentage in stocks, especially when comes to someone with $1 million.

Tailoring to Your Situation

Let’s not forget that every investor's situation is unique.

Those with guaranteed income sources, like pensions or Social Security, and ample savings can afford to take less market risk. On the other hand, retirees comfortable with market ups and downs, and who are financially well-positioned, may choose to stay more aggressively invested.

In addition, risk appetite plays a great role. Retirees who are likely to panic during a downturn should consider capping stock exposure at 50% to 60% to reduce emotional strain and prevent poor timing decisions.

Smart Strategies for Managing Risk

There are several strategies retirees can use to manage risk without abandoning stocks:

• Diversification: Owning stocks doesn’t mean betting on one or two companies. A total market index fund provides exposure to a broad mix of sectors and companies, offering built-in diversification.

• Bucketing: One way to avoid selling stocks during a downturn is to segment your investments into "buckets." Have cash and bonds set aside for near-term expenses and use stocks for long-term growth. This approach protects your equities from being liquidated at a loss during market dips.

Final Thoughts

Retirement isn't a time to eliminate growth—it’s a time to manage it wisely. Keeping a portion of your portfolio in stocks allows your savings to grow, helping you maintain your lifestyle and stay ahead of inflation over potentially decades-long retirement.

By balancing growth, stability, and personal comfort with risk, retirees can protect their nest egg and enjoy greater peace of mind.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.