Do you really need stocks in retirement?

Biggest retirement mistakes
Biggest retirement mistakes

My husband and I are retired and living comfortably on income from Social Security, a pension and other sources. We own government bonds and have FDIC-insured deposits, but no stocks. A few financial advisers have suggested we invest in stocks, but we don't want to take risks and lose sleep. Are we crazy to avoid stocks? -- J.A., Arizona

Crazy? No, I don't think you're crazy for wanting to enjoy your post-career life without constant anxiety about fluctuating stocks prices or having to worry that Brexit or some other political or financial upheaval might send the market into a nosedive that could decimate the value of your nest egg and disrupt your retirement.

And if you're really sure you can live comfortably the rest of your life on Social Security, your pension and other assured income sources without dipping too deeply into your retirement investments, then I suppose you can make a reasonable case for avoiding stocks altogether.

For example, if you have $500,000 in savings and limit yourself to an initial withdrawal of 3%, or $15,000, and then increase subsequent annual draws for inflation, the chances that your nest egg will last at least 30 years are greater than 90% even if your savings are invested in an very conservative mix of 50% cash and 50% bonds, according to T. Rowe Price's retirement income calculator.

Related: Buy an annuity now or wait for interest rates to rise?

But if you think you might have to draw more heavily on your retirement savings to maintain the retirement lifestyle you envision -- or you just want to have more of a cushion to absorb unexpected expenses -- then a no-stocks investment strategy may not be as trouble free as seem to think.

Let's say that instead of 3%, or $15,000, you need to draw an initial 4%, or $20,000, subsequently adjusted for inflation in order to maintain your standard of living. In that case, you could run into problems because a 50-50 mix of cash and bonds has less than a 50% chance of sustaining that higher level of withdrawals for 30 or more years. The simple fact is that if you're going to be counting on your savings to fund a long retirement, a portfolio without stocks will have a hard time generating the returns needed to support anything other than very low levels of withdrawals, especially given today's low interest rates

Related: Why you shouldn't abandon bonds

Fortunately, it's not as if you really have to load up on stocks to improve the chances that your savings will last a long time. A 30% stocks-70% bonds portfolio -- a mix I think many retirees would consider pretty tame -- has roughly an 80% shot at supporting a 4% withdrawal rate for 30 or more years. And it's not as if such a relatively modest stock stake is likely to expose you to catastrophic losses during severe market setbacks. In the financial crisis year of 2008, when the stocks lost more than 35% of their value, such a stocks-bonds allocation would have sustained a loss of less than 8%.

I totally get that not investing in stocks may allow you to sleep better at night. But before you abstain from equities, you might also want to consider what you may be giving up for a more restful slumber. Choosing to invest little or none of your retirement stash in stocks may give you more protection against dips and dives in the market. But the downside is that you'll able to draw less each year from your nest egg over the course of a long retirement.

Or you can look at the tradeoff a different way: the more money you need to withdraw each year from your savings to live a happy and rewarding retirement -- and the more years you'll have to make those withdrawals -- the more you'll likely need to invest at least a portion of your nest egg in stocks.

You can get an idea of how long your savings might last given various mixes of stocks, bonds and cash, different withdrawal rates and varying lengths of time in retirement by going to this retirement income calculator.

That's not to say that you should take these estimates as guarantees. They're not; they're projections. But by running several scenarios you can at least get a sense of whether the no-stocks strategy you're considering enhances your retirement security or jeopardizes it.

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