Retirees Be Warned: Abandoning Stocks Completely Could Cost You

When they reach retirement, individuals may be tempted to move their stock holdings into more stable forms like bonds or cash. In theory, it sounds like a reasonable move. After all, one market downturn can decimate decades of savings and drastically lower your net worth with little chance of financial recovery. However, some experts strongly advise against ditching stocks entirely, stating it's a mistake that could cause them to run out of money in retirement.

Throughout their working lives, many individuals rely on the compounding nature of stocks to help set them up for a comfortable retirement. But in retirement — or the years leading up to it — stocks have less time to grow, which is why some folks may be tempted to switch to other assets. However, stocks can still help retirees in two main ways: First, the average stock market return is around 10% per year, which is higher than current inflation. This rate can help retirees keep their purchasing power and fight off inflation thanks to the higher returns than other assets. Keeping stocks during retirement can also reduce the chances of outliving retirement savings, which is becoming more common, and can occur despite only withdrawing 4% of savings a year during retirement. This is largely due to the fact that Americans are living longer, so the assets they amassed in anticipation of retirement might not cover as much of their lifespan as they initially thought.

While every retirement situation is different, there's a simple age rule that helps determine the amount of stocks you should keep in retirement. This rule suggests investors subtract their age from 100 and consider the remainder the percentage of stock they should keep in their portfolio. For example, a 62-year-old individual might want to have 38% of their portfolio in stocks and the rest in stable income-generating assets. The rule works by encouraging retirees to lower stock and risk exposure, while keeping enough to mitigate inflation.

But like all quick calculation rules, this one has its limitations. This rule in particular may not work well if retirees have other forms of income from assets such as real estate, businesses, or a good pension. This rule's lack of flexibility could also result in lost gains by keeping a large exposure in bonds during periods of negative or near-zero interest rates, hurting bond yields. Speaking with CNBC, David Blanchett, head of retirement research at the investment management firm PGIM, recommended seniors subtract their age from 110 or 120 instead. These higher numbers would result in a slightly higher suggested percentage of assets kept in stocks, mitigating some of the shortcomings of other potential assets while still offering some protection from market volatility. Either way, finding the right stock allocation in retirement can be essential in order to enjoy your golden years, and it's never too early to start laying out your plan for them.