Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: How Should I Invest in Stocks After Retirement?

By Matthew Frankel, CFP® - Aug 10, 2018 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stocks should always play a role in your strategy, even as you get older.

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 (VYM 0.31%), which invests in a basket of about 400 high-dividend stocks and has an excellent record of income growth and solid returns over time.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF Stock Quote
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF
VYM
$105.81 (0.31%) $0.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.