The Pros and Cons of Owning Stocks in Retirement

Retired couple looking at the stock allocation of their retirement portfolio while sitting at a kitchen table.
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As you near retirement, you’ll want to calculate the minimum return your investments need to earn for you to meet your lifestyle goals. But what about stocks as an investment?

There are three types of people who should consider owning stocks in retirement. Stocks might be right for you if:

  1. You can afford to take on risk.
  2. You are taking on risk as part of a holistic retirement income plan.
  3. You understand the actions you need to take if the risks materialize.

Learn more about how to figure out whether you meet any or all of these criteria.

Key Takeaways

  • Owning stocks in retirement can allow you to boost your nest egg and beat inflation if the shares increase in value.
  • However, if stocks perform poorly for a prolonged period of time, you may have to reduce your spending.
  • Choosing index funds over individual stocks during retirement can significantly reduce the amount of investment risk you are taking.

Should You Own Stocks in Retirement?


Suppose you have $200,000 saved, and you decide it would be okay to die with exactly $0 in the bank. In the meantime, you'll need $10,000 per year for the next 30 years to live. Your $200k would have a required minimum return of around 3.35% to accomplish your lifestyle goal of $10,000 per year.

If you can accomplish that goal with something safe and guaranteed, like an immediate annuity, then why take on risk? On the other hand, what if you had $300,000 saved? Then, perhaps the first $200k could be used to secure your lifestyle goal; the remainder could be used to invest in stocks. At that point, you could afford to take a risk with the extra $100k.

But what if you require your stock portfolio to earn average returns in order for your plan to work? In that case, you could not afford to take the risk.

Note

"Average" means that half the time your stocks will earn more, and half the time they will earn less.

Your retirement plan should use stocks as an “extra” boost if the market does well. But if you require the stock portion of your portfolio to perform, then you don’t have a solid plan.

Are You Using Risk as Part of a Holistic Plan?

Another way to use stocks as part of a plan would be to take $200,000 and ladder out CDs or bonds. That way, $10,000 would mature each year for the next 20 years. With cash flow needs secured for 20 years, the remaining $100k could be invested in stocks. There would be an incredibly high probability that it would double in value over those 20 years.

During that 20 year period, if the stocks were to do well, a reasonable portion of gains could be taken to secure additional years of cash flow, or to fund extras along the way.

That strategy means that you would be using stocks as part of a plan. They would need to earn about a 2.36% average return over 20 years. That is well below the market’s historical 20-year returns metrics, even in a bad 20 years. In that case, you are not expecting stocks to deliver something that only happens 50% of the time.

Do You Have an Action Plan to Follow If the Risk Materializes?

What if you keep a portion of your savings invested in stocks in retirement, and stocks don’t do well at all? You must understand the repercussions.

First, you shouldn’t have money in stocks if you’ll need to sell and use that portion of your savings in the next five years. You don’t ever want to own stocks unless you have the flexibility to not sell them when the market is down.

Second, if stocks do poorly for a prolonged period of time, you may have to reduce your spending. Suppose you had planned on spending $10,000 a year from your portfolio. If stocks were to deliver zero returns, you might need to reduce spending to $9,500 or $9,000 per year.

For some retirees, the ability to spend more early on is sufficient compensation for taking on risk. But they know that if they get prolonged poor stock market returns, they may need to reduce spending later. They are using stocks in retirement, but with an action plan in place. They understand the possible consequences if stock markets don’t deliver positive returns.

How Do You ​​Own Stocks in Retirement?

If you meet the criteria above, the next thing to understand is how to own stocks. This doesn't mean putting a large portion of your funds in a single stock. It also doesn't mean sprinkling your money across a handful of stocks that you researched or read about—unless it is a small part of your total retirement funds, and you don’t require that portion to help you meet your retirement income needs.

What it should mean is putting an appropriate portion of your money into a diversified portfolio of stock index funds. By doing that, you get exposure to nearly 15,000 publicly traded companies across the globe. You also significantly reduce the amount of investment risk you are taking.

Pros of Owning Stocks in Retirement

Here is a short summary of the pros and cons of stocks as part of your retirement portfolio.

  • Based on past returns, stocks are more likely than other investments to help your portfolio and keep up with inflation.
  • Stocks give you the possibility of higher returns and thus the possibility of higher future income and the ability to leave a larger legacy.

Cons of Owning Stocks in Retirement

  • Stocks are volatile, and that volatility means that if you retire into a time period with below-average stock market returns, that could force you into a situation where you must spend less than you thought in retirement.
  • It can be stressful to weather downturns in the stock market. If you aren’t using stocks as part of a plan, the emotional stress may cause you to sell at the wrong time and thus permanently lock in a loss and force you to live on less in retirement.

You may hear about different rules of thumb, such as using your age to decide your allocation. If you're 60, for example, you should have 60% bonds and 40% stocks.

This advice might be appropriate for certain people, but for most, it might be overly simple and generalized. Many retirees have higher stock allocations than some might see as safe, because other parts of their financial picture make them able to shoulder the risk.