Invest in stocks after retirement?

Question: I’m about to retire. Is it a good idea to put all of my savings in investments with guaranteed income streams, like bonds?

Answer: Although you should definitely reduce your stock allocation in retirement, it’s not a wise move to get out of stocks altogether.

The reason is inflation. Let’s say you have a $1 million nest egg and you can get $50,000 in annual income by investing all of it in bonds. That’s great for the time being, but the problem is that $50,000 in say, 20 years, will not have the same purchasing power it does today. Stock investments can generate income and can also allow you to grow your income stream over time, helping you keep pace with inflation.

Having said that, there are a couple of things you should know. First, a good rule of thumb is to subtract your age from 110 to determine your ideal stock allocation. So, if you’re 70, this means you should have about 40 percent of your portfolio in stock investments. Second, when selecting stock investments, it’s important to realize your priorities shift in retirement. Specifically, instead of growing your nest egg, your priorities are preserving your wealth, generating income and avoiding excessive volatility.

Of course, ETFs can allow retirees to maintain some diversified stock allocation. One of my favorites for incomeseeking retirees is the Vanguard High Dividend Yield ETF, which invests in high-dividend stocks and has an excellent record over time.