Q: I'm about to retire. Is it a good idea to put all of my savings in investments with guaranteed income streams, like bonds?
The short answer is no. Although you should definitely reduce your stock allocation in retirement, it's not a wise move to get out of stocks altogether.
The reason is inflation. Let's say that you have a $1 million nest egg and that you can get $50,000 in annual income by investing all of it in bonds. That's great for the time being, but the problem is that $50,000 in say, 20 years, will not have the same purchasing power that it does today.
Stock investments can generate income and can also allow you to grow your income stream over time, helping you keep pace with inflation.
Having said that, there are a couple of things you should know. First, a good rule of thumb is to subtract your age from 110 to determine your ideal stock allocation. So, if you're 70, this means you should have about 40% of your portfolio in stock investments.
Second, when selecting stock investments, it's important to realize that your priorities shift in retirement. Specifically, instead of growing your nest egg, your priorities are preserving your wealth, generating income, and avoiding excessive volatility. For this reason, relatively stable income stocks like Verizon Communications and Johnson & Johnson can make good retirement investments. Netflix and Amazon.com -- not so much.
Of course, ETFs can allow retirees to maintain some diversified stock allocation. One of my favorites for income-seeking retirees is the Vanguard High Dividend Yield ETF (NYSEMKT:VYM), which invests in a basket of about 400 high-dividend stocks and has an excellent record of income growth and solid returns over time.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN and NFLX. The Motley Fool owns shares of JNJ and has the following options: short October 2018 $135 calls on JNJ. The Motley Fool has a disclosure policy.