the retirement? Here’s Why You Don’t Want To Dump Your Stock | personal financing
If you’re about to retire, you might be preparing for some big changes. This can include downsizing your home, moving to a different part of the country, and moving from working 40 hours a week to not having to work at all.
You may be tempted to make changes in your portfolio as retirement approaches, too. This is a good thing.
You can take more risk in an IRA or 401(k) plan when retirement is many years away from you. But as that milestone approaches, it’s a good idea to shift toward more conservative investments, such as bonds.
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Since the beginning of the year, the stock market has taken investors on a wild ride – most people would have preferred to skip it. Thus, if you are about to retire, keeping a large portion of your portfolio in stocks is a risky prospect.
But this does not mean that you should dispose of your entire stock by the end of your career. And if you go down this path, you may very much regret it.
You still need inventory to generate growth
The logic for switching to bonds as retirement approaches, or once you retire, is simple. At this point, there’s a good chance that you’ll be tapping into your wallet regularly and living off your savings. Thus you cannot risk a scenario in which the value of your portfolio decreases by 30% in a two-month period due to a stock market crash.
But while it’s a good idea to reduce your stock of stocks as retirement approaches, you should still keep a decent portion of your stock portfolio. the reason? You need these stocks to keep your nest eggs growing.
If you’re about to retire, you’ve probably heard of the 4% rule, which states that if you start by withdrawing 4% of your savings balance in the first year of retirement and adjust post-withdrawals for inflation, your nest egg should last a good 30 years. For many seniors, that will be enough to cover their entire retirement.
But to make the 4% withdrawal rate possible, your investments must continue to work for you. And if you get rid of your stocks completely, you probably won’t generate enough growth in your portfolio to maintain a 4% withdrawal rate. (By the way, many think the 4% rule is now obsolete – but that’s a different discussion.)
Easily deal with stocks, but don’t give them up completely
The percentage of your portfolio that you keep in stocks during retirement should depend on various factors, including different income sources and risk tolerance. But for the most part, you probably don’t want more than 60% of your assets in stocks once you retire. And you probably don’t want less than 30%. So from there, you can look at your personal financial picture to determine where to land.
Remember, too, that stocks have the potential to generate dividend income for you. This can become very useful once you stop earning your salary from the job.
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