At What Age Should You No Longer Be Investing in Stocks?
When, or if, you should stop investing in stocks is a personal decision that will vary from person to person. The right answer depends on a wide variety of factors, from your life expectancy to your health situation to your own personal risk tolerance.
However, while the final answer will vary from investor to investor, the questions you should ask to determine at what age you should not be in the stock market remain the same. Here are some of the most important factors to consider when making that decision for yourself, along with specific suggestions to take into account.
General Guidance: Reduce Risk When You Retire
Over the long run, stocks are among the very best investments for generating capital gains. On average, U.S. stock markets return about 10% annually, and there has never been a rolling 20-year period in which the S&P 500 actually lost money.
However, on a day-to-day basis, stocks can be extremely volatile, and bear markets can be devastating. That 10% average annual return figure can actually be a bit deceiving, as bear markets — in which the major indexes drop by at least 20% — occur quite regularly, every four-to-five years on average.
If you’re young, these two factors taken together are actually positive. Over the long run, stocks have historically bounced back from selloffs, and major market drops are actually buying opportunities. But if you’re retiring at age 70, you won’t have time to recover from a bad period in the markets. If you have 100% of your portfolio in stocks and you encounter a bear market, that 20% drop will require a 25% recovery simply to break even. If you’re living off your portfolio at that point, the drop in income you’ll experience can be extremely damaging to your lifestyle.
The question at this point then becomes whether you should completely stop investing in stocks or simply reduce your exposure — and that depends on your personal financial characteristics.
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If you’re retiring in poor health, it’s a good time to consider eliminating your stock allocation. As you age, your health expenses will likely dramatically increase, and you’ll need a combination of income and capital to pay those costs.
If you have all of your money in stocks and encounter a drop of 10% or 20% — or even more — you’re much more likely to come up short when it comes to covering your health expenses.
If you have adequate insurance coverage, you may be able to maintain an allocation to stocks. If your insurance is good enough to cover your retirement healthcare expenses, that relieves much of the burden of your portfolio to earn income, or to be sold off at inopportune times.
If you can otherwise afford your lifestyle, then it can make sense to keep some money in stocks to help you combat the rising costs caused by inflation.
If you have a significant pension, 401(k) or other source of retirement income, you can usually keep some of your portfolio in stocks, even at an advanced age. With your income needs covered, your ongoing stock allocation can still help you grow the value of your portfolio. And with a larger portfolio down the road, your assets can someday generate even more income for you.
When you first start investing in stocks, your risk tolerance is one of the most important factors to consider. But as you get closer to retirement, your risk tolerance plays less of a role in determining your allocation.
This is because no matter how much your stomach can handle a large drop in the stock market, your retirement portfolio generally cannot. In other words, even if you can emotionally tolerate a big drop in your portfolio value, for the reasons described above, the damage to your income stream and/or financial wellbeing in retirement may never recover.
This is too big a risk to take, even if you’re mentally prepared to cope with bear markets.
Final Thought: Reason To Always Consider at Least a Small Allocation to Stocks
For a long time, conventional wisdom among financial advisors was that investors approaching retirement should sell their stocks and buy more conservative, income-generating investments like CDs or bonds. While this may reduce the portfolio risk for investors, it courts another risk — that of outliving your money.
As inflation eats away the value of your portfolio over time, investing 100% of your money into low-yielding, conservative investments may actually give you a negative real return (calculated by subtracting the rate of inflation from your rate of return). This has been particularly true in 2022 and 2023, when inflation rates reached their highest levels in over 40 years. While stocks may be riskier on a day-to-day basis, they can help combat this risk of inflation eating away the value of your money.
Another factor to consider is that even if you’re 70 years old, you may very well live another 20, 25 or even more years. With this long of a runway, holding stocks becomes much less risky, and can actually help your portfolio fund your long retirement.
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