You’re entitled to be sick of the stock market by the time you retire.
All those decades of rallies and crashes. Making money, losing money. It’s stressful enough to endure these ups and downs while you’re still working and have time to save more for retirement. But when you’re out of the workforce and living on your savings, the stock market can seem like the enemy.
I suggest you make peace with the stock market in retirement because you’re going to need its help to make your money last. There are 2 reasons why you shouldn’t get out of stocks entirely.
One is the need to keep your portfolio growing even after you retire. Unless you’ve saved industriously and have a surplus of retirement savings, you’re going to want to at least partially offset the depletion of your investments in your senior years with some growth. Remember, we’re living longer. Not too long ago, I saw a rack of birthday cards for 90-year-olds in a greeting card store. Long lifespans aren’t the exception anymore – they’re normal.
Low interest rates are another reason to keep some stocks in your portfolio in retirement. The best 5-year rates on guaranteed investment certificates were in the 2.5 to 2.85% range as of early 2013, and 5-year government bond yields were well the range of 1.5%. If you bought an exchange-traded fund tracking an index of dividend-paying stocks listed on the Toronto Stock Exchange, you could get a dividend yield of 3.5 to 4%.
Dividend stocks have done quite well in recent years and they weren’t bargain-priced as 2013 opened. But they do offer the benefit of a dividend flow that, if you pick solid companies, will continue through good markets and bad. The strongest dividend stocks actually increase their payouts of cash from year to year.
Stocks can fall at any time, so remember to structure your retirement investments accordingly. Have enough money in cash and risk-free investments to cover at least 2 or 3 years’ worth of retirement income. Never put yourself in the position of having to cash in hard-hit stocks or equity funds to meet your income needs. And don’t overdo it on stocks. At age 70, think about a minimum weighting of 20% and a maximum of 30%, or maybe a little more. GICs, bonds and cash are a foundation for your retirement investments, but you’ll quite likely need more growth than they can provide.