Do I need to invest in stocks for retirement?

  @CNNMoney October 26, 2012: 6:15 PM ET
chart safety net

Can I skip investing in stocks altogether during retirement if I have saved a lot? -- Andrew C., Florida

After seeing stocks plummet almost 60% between late 2007 and early 2009, I understand why you may want to avoid them. And you can, as long as you're able to live comfortably on a very low withdrawal rate.

With a 100% bond portfolio, taking out 3% of your portfolio's value initially and then adjusting that amount annually for inflation would leave you with roughly an 80% chance of your money lasting 30 years.

But is such a low withdrawal rate realistic? For most retirees, I think not. And once you start taking out more -- even going from 3% to 4% -- avoiding stocks reduces your return potential so much that it leaves you vulnerable to running out of dough early.

That said, you don't have to go overboard. Invest half your savings in stocks and half in bonds -- close to what 401(k) participants in their 60s do on average, according to the Employee Benefit Research Institute -- and you have just under an 80% chance of your portfolio lasting at least 30 years, assuming a 4% withdrawal plan. Even if you reduce your stocks to 30% of your portfolio, that probability falls to just 70%.

Related: Worried about the fiscal cliff: Should I sell?

So why go with anything more than the absolute lowest amount of stocks necessary? Leaning a bit more toward equities may enhance your financial security in other ways.

One benefit is that stocks can help you maintain a higher balance in your retirement accounts than a more conservative mix would (see graphic above).

Self-employed? Here's how to save

Having a cushion as you enter your later years can provide a margin of safety in case you run into higher-than-expected health care costs or other unanticipated expenses.

What's more, in the event your spending creeps up, a more stock-heavy portfolio may be better able to absorb the higher outlays. Boosting your withdrawals with a more conservative mix is far more likely to send your nest egg to an early demise.

Related: Make your retirement savings last

You've also got to consider your own circumstances. With few resources beyond your investments -- no pension or little home equity -- you may want to opt for a less aggressive mix. Just remember the price for playing it too safe. To top of page

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