Think Stocks Are Too Risky for Your Retirement Savings? Why Dumping Them Completely Is a Huge Mistake

If you're approaching retirement, it's natural to become more concerned about protecting your nest egg. After all, you probably spent decades funding your IRA or 401(k). And the last thing you want is to see your portfolio lose value during a market crash when you actually need the money to cover living expenses.

You may be inclined to sell all of your stocks and limit your retirement investments to conservative options like bonds, cash, and CDs. But while that approach may help you avoid stock market volatility, it exposes you to some very big risks.

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You still need your money to grow

Many people underestimate how long retirement can last. If you stop working in your mid-60s, you might need your retirement savings to last another 20 to 30 years -- or even longer.

Over that time, inflation could erode your buying power, so you need assets in your portfolio that have the potential to beat it. Stocks fit the bill in that regard more so than bonds and cash.

Although stock values can fluctuate from year to year, they've historically outperformed inflation over the long run. And you need that growth so you're able to take regular portfolio withdrawals and adjust them upward as living costs rise.

If you don't have at least some of your assets in stocks, you may need to limit your spending, which could impact your quality of life. And if your withdrawals keep outpacing your portfolio's growth significantly, over time, you could risk whittling your savings down to nothing.

A balanced approach can reduce risk without sacrificing growth

There's no reason to keep the majority of your assets in stocks during retirement if doing so doesn't align with your risk tolerance. But you may want to keep about half of your assets in stocks so your portfolio continues to grow in value.

If that doesn't work for you, come up with a percentage that does. Maybe it's 40%. Maybe it's 30%. But it really shouldn't be 0%.

One thing that may make you more comfortable with the idea of keeping a chunk of your retirement assets in stocks is a cash cushion that can cover several years of bills. If you keep three years' worth of expenses in cash, that gives you a long period of time to ride out a stock market downturn without having to sell a single share in your portfolio at a loss.

It's natural to worry about stock market volatility in retirement. And it's easy to see why you may be inclined to get rid of stocks in your portfolio completely for peace of mind. But ditching stocks creates another big risk. So rather than do that, work to find a balance that allows your portfolio to keep growing without causing you to lose sleep.

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