While the stock market has performed well over the long term (even when you include the 2008-09 meltdown), it can be brutal in the short term.
It is this timing issue that poses the greatest threat to retirement incomes. The conventional wisdom is that you should reduce your exposure in stocks as you approach and enter your retirement.
This is still good advice, however it is not that simple – few things are these days.
Here’s the problem: if you pull out of stocks too soon or reduce your stock holdings too far, you may not have enough money to fund your retirement (also known as outliving your money).
On the other hand if you stay in the market too long with too great of percentage of your assets in stocks, a selloff could put a big hole in your nest egg.
There is a saying I’m fond of: “If I had known I was going to live this long, I would have taken better care of myself.”
An appropriate paraphrase of that quote might be: “If I had known I was going to live this long, I would have taken better care of my money.”
So, where is the Goldilocks (not too hot and not too cold on stocks, but just right) solution? The answer will vary from person to person. Some people have a higher tolerance for risk and believe they can spot the beginnings of a serious downturn before it does significant damage.
This is good in theory, but it is not always easy to distinguish between a temporary dip and the beginnings of a prolonged period of falling stock prices.
If you don’t have confidence in your ability to sell before a real loss (and most people fall into this category, whether they admit it or not), your choice is to save even more before you retire and plan on spending much less in retirement.
The safest bet for most people in this group is safe fixed income securities (highly-rated bonds, bank CDs, and so on).
Either way, be prepared for a volatile stock market to wreak havoc in the short term. That’s one thing you can almost always plan on with confidence.
Articles on Investing for Retirement in this Series
Tough Choices for Stock Investors Facing Retirement
What to Do If You Lose Your 401(k) Match
Can Your 401(k) Be Resurrected?
Investing to Avoid the Longevity Risk
Time to Re-Think Role of Stocks in Retirement
Don't be too Conservative with Stocks in Retirement
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