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You spent your working years saving for retirement, confident you could recover from any market dips because you had the time—and future income—to do so. Now, as you near retirement, you may be wondering if it’s time to move away from stocks and into “safer” investments (i.e., those that are low risk, low reward). It can be a tough call to make, especially if those stocks have performed well throughout the current bull market, now in its eighth year.

People trading stocks.

Smart Risk

People are living longer today, which means you’re (one hopes) going to need more money to see you through your retirement years. With that in mind it’s important to note that just because you retire doesn’t mean you should sell all your stocks and put that money into low-interest certificates of deposit (CDs).

While you certainly had more time to recover from market losses when you were in your 30s and 40s, odds are you’ll have time to ride out a market crash (or two) if it happens when you’re close to retirement—or even after you’ve retired. History tells us that since the 1930s the average bear market lasts only 18 months. The recovery following the Great Recession of the late 2000s—the worst global recession since the 1930s—took about five years.

It’s Not Just the Size of the Egg

While most people aspire to create the largest nest egg possible, it’s important to focus on the income stream it offers, especially as you near retirement. Here’s a simplified example that shows the difference.

Say you have $500,000 nest egg tied up in a five-year CD paying 2 percent interest. After five years it will earn about $52,000—or a little more than $10,000 a year.

Now assume your nest egg is only $250,000, but you have it in a dividend-paying stock with an average annual dividend yield of 3.3 percent. After five years the stock will have paid out just over $44,000—about $9,000 a year. That’s nearly the same income stream you got from an egg that’s half the size. The point is that it’s not just the size of the egg that matters; it’s the income stream it’s capable of generating that’s really important.

Do the Math

Still, 41 percent of certified public accountant financial planners say their clients’ number one concern (fear?) about retirement is running out of money. For these investors it can make sense to determine the lowest rate of return you’ll need to achieve your retirement goals—at the least amount of risk. To do so, start by adding up all the income streams you can count on during retirement, things such as pensions, Social Security retirement benefits, annuities and the like.

Now figure out how much income you’ll need to comfortably cover your expenses during retirement. Be sure to include all your living expenses (including housing costs, utilities, food, clothes, transportation, entertainment, gym memberships and the like), plus health insurance and anticipated medical expenses. If you plan on traveling during retirement, include those costs as well.

Finally, check to see if those reliable income streams are enough to cover your expenses during retirement. If so, you may be in a good position to hang onto those stocks if you’re still comfortable with the risk.

If your income stream needs a boost, however, it might be time to consider moving that money into investments that can help lower your risk while creating a monthly or quarterly income stream. Alternatives include bonds (you can invest in bonds through mutual funds and ETFs), rental property, carefully selected dividend-paying stocks, preferred stocks and annuities. Just be sure to pay close attention to the fees.

If you have questions or concerns about managing your portfolio as you near retirement, it can be a good idea to discuss your situation and options with a qualified financial planner. Doing so can pay off—both financially and emotionally—now and into retirement.

 

 

 

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