What is a “safe” choice for your portfolio may never be.
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If you’re nearing retirement, it’s natural to be more concerned about protecting your nest egg. After all, you’ve probably spent decades funding your IRA or 401(k). And the last thing you want is to have your portfolio lose value due to a market crash when you actually need the money to cover your living expenses.
You may be inclined to sell all your stocks and limit your retirement investments to conservative options such as bonds, cash, and CDs. However, while this approach may help you avoid stock market fluctuations, it exposes you to some very large risks.
still needs money to grow
Many people underestimate how long their retirement will last. If you stop working in your mid-60s, your retirement savings may need to last another 20 to 30 years or more.
Inflation can erode your purchasing power during that time, so you need assets in your portfolio that have the potential to beat inflation. Stocks are better than bonds or cash in this regard.
Stock prices can fluctuate from year to year, but they have historically outpaced inflation over the long term. And you need that growth so that you can regularly withdraw from your portfolio and adjust it upwards as the cost of living increases.
If you don’t have at least some of your assets in stocks, you may need to limit your spending, which can affect your quality of life. And if your withdrawals continue to significantly outpace your portfolio growth, you run the risk of your savings being wiped out over time.
A balanced approach allows you to reduce risk without sacrificing growth
There’s no reason to keep a large portion of your assets in stocks after retirement if it doesn’t match your risk tolerance. However, you may want to keep about half of your assets in stocks so that your portfolio continues to increase in value.
If that doesn’t work, think about the percentage that does. Maybe it’s 40%. Maybe it’s 30%. But it really shouldn’t be 0%.
What might make the idea of holding some of your retirement assets in stocks even more appealing is a cash cushion that can cover several years’ worth of bills. If you keep three years’ worth of expenses in cash, you’ll have a longer period of time to ride out stock market downturns without losing a single stock in your portfolio.
It’s natural to worry about stock market fluctuations after you retire. And it’s easy to see why you might want to completely liquidate stocks in your portfolio for peace of mind. However, parting with stocks creates another big risk. So instead of doing that, try to find a balance that allows your portfolio to continue to grow without losing sleep.
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