How Much Should Retirees Keep Invested in the Stock Market?

Most people treat retirement stock allocation as a percentage question. Should I be at 60 percent stocks? 40? Something lower now that I’m retired?

The percentage is the wrong place to start, and it’s why the question feels impossible to answer. A percentage doesn’t tell you anything about whether you’d have to sell during a decline. That’s the thing that actually does the damage.

There’s a better question underneath it, and it has a number you can calculate at your kitchen table.

Picture this

Suppose a couple in their early 60s has just retired. Social Security covers part of the monthly bills. Their investments cover the rest, about $60,000 a year.

Right now it works. What they haven’t done is ask what happens if stocks fall 30 percent in their second year of retirement and stay down for a while.

If that happens, they’re selling shares at reduced values to pay for groceries. Those shares are gone. They aren’t there to participate when the market eventually turns. The same decline 20 years later, after the balance has already done most of its work, costs them far less.

The question isn’t how much they hold in stocks. It’s whether they’d be forced to sell any.

The better question: how many years can you cover without selling stocks?

Here’s the reframe. Add up what you need from your investments in a year. Then look at how much you hold in things that aren’t stocks. Cash, short-term bonds, a money market.

Divide the second number by the first. That’s how many years you could pay yourself without touching a single share.

For the couple above, $60,000 a year is the denominator. If they hold $180,000 outside of stocks, they have 3 years of cover. At $300,000, they have 5.

Now the decision is concrete. You’re not picking a percentage off a chart. You’re deciding how many years of breathing room you want before a decline could force your hand. Your retirement stock allocation falls out of that answer rather than driving it.

How long have declines actually lasted?

If the number of years is the decision, it helps to know what you might be waiting through.

Morningstar examined 150 years of US stock market history, using data compiled by Paul Kaplan, and counted 19 bear markets, which they define as a decline of 20 percent or more. That’s roughly 1 per decade.

What matters for your purposes isn’t how deep they went. It’s how long they lasted, and the range is enormous:

• The COVID decline in March 2020 fell 19.6 percent and recovered in 4 months, the fastest of the 19
• The decline that began in December 2021 fell 28.5 percent over 9 months and took 18 months to recover
• The 1973 decline, driven by the oil embargo and the inflation that followed, fell 51.9 percent and took more than 9 years
• The stretch beginning in August 2000, covering the dot-com bust and the financial crisis, fell 54 percent and didn’t fully recover until May 2013, more than 12 years later

Each of those 19 declines was eventually followed by a new high, according to the same data. What varied, enormously, was how long that took.

So 4 months at one end and more than 12 years at the other. Nobody can tell you in advance which kind you’re walking into, and Morningstar’s own conclusion is that recovery timelines can’t be predicted.

That’s the point. You can’t know the duration, so the planning question becomes how long you could go without needing to sell. Two or 3 years of cover would have carried you through most of the 19. It would not have carried you through 1973 or the stretch after 2000.

The other failure, which is quieter

Everything above argues for holding less in stocks. There’s a pull in the other direction, and it’s easy to underrate because nothing dramatic happens on any particular day.

A retirement that starts at 62 can run 30 years. Across that span, the cost of groceries, housing, insurance, and medical care generally doesn’t hold still. Money parked entirely in cash tends to lose purchasing power over that stretch, quietly, year after year.

Neither failure announces itself. One arrives in a single bad year when you’re selling at the wrong values. The other arrives slowly, as the same monthly withdrawal buys less than it used to.

The years-of-cover approach is aimed at the first without surrendering entirely to the second. You hold enough outside of stocks to weather a decline without selling into it, and the rest stays invested for a retirement that may last decades.

Where your income comes from changes the answer

Two people with identical balances can land in very different places.

Consider someone whose pension and Social Security cover nearly all their monthly expenses. Their investments aren’t funding the grocery bill, which means a decline doesn’t force a single sale. They may be able to hold more in stocks than they’d assume, because their withdrawal need is close to zero.

Now consider someone with no pension, whose savings cover most of what they spend. Every month is a withdrawal. A decline reaches them immediately.

Same balance, different retirement stock allocation. That’s why your total savings tell you less than the gap between what you spend and what arrives without selling anything.

Start there. Essential expenses first, then the reliable income that covers them. Whatever is left over is what your investments have to produce, and that number is what sets everything else.

Which account the stocks sit in matters too

One piece that rarely comes up in the percentage conversation. It isn’t only how much you hold in stocks, but which account holds them.

A pre-tax 401(k) or IRA, a Roth, and a taxable brokerage account are each taxed differently when you take money out. That means growth inside each one is taxed differently, and the balance that grows inside your pre-tax accounts also drives your required minimum distributions, which begin at 75 for anyone born in 1960 or later.

So the same allocation, arranged two different ways across those accounts, can produce two different tax results over 20 years. It’s worth looking at alongside the allocation question rather than after it. This is general education rather than advice for your situation, and the arithmetic depends on your own numbers.

The questions that tend to stop people cold

When we sit down with someone working through this, the hard part is rarely the investment choice. It’s how many simple questions still don’t have answers.

• What do you need from your investments in a year, after Social Security and any pension?
• How much do you hold right now in something that isn’t stocks, and how many years of withdrawals does that cover?
• If stocks fell 30 percent next year, which account would the grocery money come from?
• What would your monthly withdrawal buy in 20 years if costs keep climbing?
• Which accounts are your stocks in, and why that one?
• When did you last revisit any of this?

If those are hard to answer, that’s the normal place to be. Almost nobody has worked through them on purpose.

What retirement stock allocation really comes down to

Notice that none of this required predicting the market. The years-of-cover number is arithmetic, and it turns an unanswerable question into a decision you can actually make.

That’s the work we do. We start with what you’ll actually spend and which part of it arrives without selling anything. We size the cover against the withdrawals you’d need in a bad stretch. We look at which accounts hold what, with your bracket today set against your bracket at 75. For tax filings, we work alongside your CPA; for anything involving legal structure, your attorney.

Your plan should reflect what your money has to do for you, not a percentage on a chart. And as that changes, the answer changes with it.

See where you stand

If you’d like a clearer picture of where you stand, start with the Retirement Confidence Assessment.

ABOUT THE AUTHOR

Sunwook Jin is a Certified Financial Planner and the author of There Are No Do-Overs at Retirement. He leads a team at Redwood Financial Network that helps people approaching retirement turn their savings into income, reduce tax surprises, coordinate their savings, pension, Social Security, and estate strategies, and see their entire plan in one place.