You'll often hear that in the course of saving for retirement, it's important to take on some risk in your portfolio. If you play it too safe, your money may not grow at a fast enough pace to result in the nest egg you want.
But just as it's crucial to manage your portfolio well in the years leading up to retirement, it's equally important to manage your portfolio well during retirement. And that means loading up on just the right amount of stocks.
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It's all about balance
Seniors are commonly advised to shift away from stocks as retirement nears and move over to safer investments, like bonds. That advice is spot-on.
You can't afford to have too much of your retirement savings in stocks once you reach a point where you're actively tapping your nest egg. If you go too heavy on stocks, you might end up having to lock in losses in your portfolio due to needing the money immediately in retirement. But if you load up on bonds, those are the assets you can potentially sell off during periods of market turbulence to avoid losses altogether.
On the other hand, dumping your stocks completely during retirement is a big mistake, and one you should avoid. You need stocks in your portfolio so that your nest egg is able to continue growing. If you get rid of your stocks, your portfolio may not be able to provide the income you need to supplement your Social Security benefits and cover your expenses in full.
What's the right allocation to target?
When it comes to holding stocks in retirement, there's no single rule of thumb to follow. The percentage of your portfolio that you choose to keep in stocks might hinge on factors like your tolerance for risk and the different income sources you're privy to.
But if you're really not sure where to begin, one construct that works for some people is to subtract your age from 110 and allocate that percentage of your portfolio to stocks while you're retired. So if you're 70 years old, you'd subtract that age from 110 to arrive at 40 -- meaning, keep 40% of your portfolio in stocks.
To be clear, this is not a perfect system. And if you're someone who has different income streams and more risk tolerance, you may decide that you'd rather keep 50% or even 60% of your retirement portfolio in stocks. You may even decide to go higher than that if you're aware of and comfortable with the risks involved, and you have plenty of cash to fall back on during a potential stock market crash.
The point, however, is that it's important to not go too heavy on stocks while you're retired, and it's also important to not get rid of them completely. It could be a good idea to sit down with a financial advisor and work out an allocation that's ideal and appropriate for you, since there's no single, specific formula to fall back on.
