You may be inclined to pull all of your money out of the stock market in retirement. But that’s a truly bad idea.
Investing your money is essential to growing wealth for retirement. In fact, if you don’t invest your money at all and simply let your savings sit in cash, you might end up with a serious income shortfall.
But it’s not just important to invest in the years leading up to retirement. You should also aim to keep some money in the stock market during retirement. Here’s why pulling your money out as a senior could be a huge mistake.
Image source: Getty Images.
1. Continuing to grow your nest egg could allow for larger withdrawals
It’s important to manage your 401(k) or IRA during retirement so you don’t run out of money. And to that end, it’s a good idea to establish a safe withdrawal rate (either on your own or with the help of a financial advisor) before you start tapping your savings.
For many years, financial experts have recommended the 4% rule. It has you withdrawing 4% of your savings balance your first year of retirement and then adjusting withdrawals in future years for inflation.
But the 4% rule assumes that you’re still investing about 50% of your savings in stocks. And if you’re not going to do that, then you may need to stick to a much smaller withdrawal rate to ensure that your money doesn’t run out. That could result in a much less comfortable retirement lifestyle.
2. You can take advantage of gains and enjoy extra income
There may be periods when the stock market exceeds expectations during your retirement. If you stay invested, you can take advantage of periods like those and increase your withdrawals temporarily for extra income.
Say there’s a big trip you’ve always wanted to take. If your portfolio value soars one year, you may be able to take the money and book that flight.
3. You still have opportunities to ride out stock market downturns
You may be scared to keep investing during retirement because you’re worried about a stock market downturn. But you shouldn’t use that as a reason to pull all of your money out of stocks. If you allocate your assets wisely in retirement, you can ride out a downturn — even an extended one.
First of all, as mentioned above, you don’t need to keep the bulk of your retirement portfolio in stocks — and you shouldn’t. Keeping 50% in stocks and the remaining 50% in cash and bonds gives you an opportunity to continue growing your savings while also having stable assets to tap as needed.
In fact, it’s a good idea to maintain enough cash savings in retirement to cover one to two years of expenses. If you do that, you’ll have plenty of time to hold off on tapping the stock portion of your portfolio in the event of a prolonged market decline.
It’s definitely a good idea to invest less heavily in stocks during retirement than in the years leading up to that stage of life. But don’t ditch the stock market completely during your senior years. If you do, you may find that you’re not able to enjoy as much income as expected. Or, you might end up whittling your savings down to $0 without even realizing it.
