If you’re throwing away your retirement stocks, you’re making a big mistake

An old colleague of mine recently retired after a 40-year career. She’s excited about the next chapter of her life, but like many people in her boat, she’s worried about the financial end of things.

Fortunately, it has nice savings. But when she told me she planned to dump the entire stock portion of her portfolio, I was quick to tell her what a bad idea I thought that was.

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There’s a big misconception that stocks don’t belong in retirees’ portfolios once they’re at a stage where they’re tapping into their nest eggs for income. But buying into this myth could cost you a lot of time.

You cannot afford to lose all your stock

It’s easy to see why you might be inclined to get rid of your stocks in retirement. Stocks can be very volatile. At a time when you need your portfolio for income, it can be discouraging to see its value fluctuate with market changes.

It can also be very risky to keep too much of your savings in stocks once you’re retired. But on the other hand, it can be just as risky to let yourself go not any stocks in your portfolio

Without stocks, your portfolio could lose momentum and gain minimal value during your aging years. This could translate into one of two things – running out of money sooner than expected, or having to limit retirement plan withdrawals from year to year, causing an income shortfall. No situation is ideal.

Consider this: For years, financial experts have recommended using the 4% rule to manage retirement savings. The rule requires you to withdraw 4% of the value of your nest egg in the first year of retirement and adjust subsequent withdrawals to account for inflation.

But the 4% rule assumes a fairly even mix of stocks and bonds. If you take stocks completely out of the equation, you may not be able to pull 4% out of your savings each year. That could force you to live a more limited lifestyle.

It’s all about balance

I wouldn’t recommend keeping 75% of your portfolio in stocks as a retiree. And if 50% is a stretch for you, you don’t even have to do that.

But you should definitely keep it some from your stock portfolio once your career ends. That’s what I told my former colleague and I would tell anyone with what I hope will be a long retirement ahead of them.

Just as you can use stocks to fuel your savings while you’re in the wealth-building stage, you can use them to keep your portfolio growing — albeit perhaps at a slower pace — in retirement. You can take steps to minimize the risks involved by having a nice chunk of your nest egg in bonds and keeping one to two years’ worth of cash on hand. By doing these things, you get a good amount of protection without giving up the benefits of stock.