For decades, financial advisors have consistently urged investors to “stay the course,” reassuring them that market downturns are temporary and that the stock market will always recover in the long run. While this advice may hold merit for younger investors with decades ahead of them, it is increasingly questionable for pre-retirees and retirees who do not have the same time horizon to recover from significant losses. The risks of remaining heavily invested in stocks in the years leading up to and during retirement can far outweigh the benefits. The prevailing advice from advisors, especially those seen and heard on large media outlets is surely misinterpreted by many as advice for “all,” and not advice for “some.” Here’s why pre-retirees and retirees should seriously consider pulling out of the stock market despite the prevailing financial advice to stay invested.
- Sequence of Returns Risk Can Devastate Retirement Savings
One of the biggest risks retirees face is “sequence of returns risk,” which refers to the danger of experiencing significant market losses early in retirement. Unlike younger investors who can afford to wait for the market to rebound, retirees who are withdrawing from their portfolios during a downturn may never recover.
For example, a retiree who experiences a 30% market downturn within the first five years of retirement and continues to withdraw the same amount for living expenses will see their savings deplete much faster than if the downturn had occurred later in retirement. Once those funds are withdrawn and spent, they no longer have the opportunity to grow again, permanently reducing the retirement portfolio’s longevity.
- Market Volatility Can Create Emotional Decision-Making
Market fluctuations can be emotionally taxing, and retirees may find themselves constantly stressed about their portfolio’s performance. Fear-driven decisions, such as panic-selling during a downturn, can lead to devastating financial consequences. Even those who believe they can ride out the volatility may find it psychologically difficult to watch their life savings dwindle during a bear market.
Additionally, retirees do not have the luxury of continuing to earn and invest at the same rate as they did during their working years, making it harder to recover from impulsive decisions driven by market swings. Avoiding market volatility altogether by moving funds to safer investments can bring peace of mind and stability.
- The Stock Market is Overvalued and Ripe for a Major Correction
Prior to the change in presidential administrations, many experts argued that the stock market was in a precarious position due to prolonged periods of historically high valuations, with back-to-back 20% plus gain years. The current political climate undoubtedly has made the markets even more skittish and has given institutional investors additional reasons for concern, as the uncertainty of tariffs and unprecedented cuts in the federal workforce work through the system.
Pre-retirees and retirees should be cautious about betting their financial security on a market that may be poised for a significant correction. The repercussions of such a decline could be far more damaging for someone who depends on their investments for day-to-day expenses compared to a younger worker who has time to recover losses.
- Safer Income Alternatives Are Available
Contrary to what many advisors suggest, withdrawing from the stock market does not mean stuffing money under the mattress. There are several lower-risk investment alternatives that can provide a stable income while preserving capital. Some of these include:
- Treasury Bonds and I Bonds – U.S. government bonds offer security and often competitive yields, especially in times of rising interest rates.
- Certificates of Deposit (CDs) – With higher interest rates, CDs can provide a safe and predictable return.
- Fixed Annuities – These products can provide guaranteed income without the risk associated with market fluctuations.
- Dividend-Paying Stocks or REITs – For those who still want some exposure to equities, selecting stable dividend-paying companies or real estate investment trusts (REITs) can offer steady income with less volatility.
- Cash and Money Market Accounts – Holding a portion of assets in cash or money market accounts provides liquidity and flexibility during economic downturns.
By reallocating funds to these safer investments, retirees can create a more stable and predictable income stream that does not rely on stock market performance.
- Retirement is About Preservation, Not Speculation
While younger investors focus on growth, retirees should shift their priority to wealth preservation. The adage “you can’t get rich twice” applies to those who have already accumulated substantial assets. For retirees, the goal should not be to maximize returns but to ensure that they do not outlive their savings.
A stock-heavy portfolio may have served well during the accumulation phase, but relying on the same strategy during retirement exposes one to unnecessary risks. The transition from wealth accumulation to wealth preservation requires a more conservative approach.
- The Myth of the 4% Rule and Why It May No Longer Work
Many retirees plan their withdrawals based on the 4% rule, which suggests withdrawing 4% of the portfolio annually to sustain a 30-year retirement. However, this rule was based on historical market conditions that may not hold in today’s economic climate, especially with lower expected returns and higher inflation risks.
If future stock market returns are lower than historical averages or if inflation remains persistently high, retirees relying on the 4% rule may run out of money sooner than anticipated. Exiting the stock market and focusing on more stable income sources can be a smarter strategy to ensure long-term financial security.
More importantly, bond yields may shift and what might seem like a safe investment in a bond fund, could quickly turn to negative returns in a rising interest rate environment. Conversely, lower interest rates could make re-investment risk a big concern for CD and short-term treasury buyers spoiled by 5% rates.
- A Shift in Investment Philosophy is Warranted
The investment philosophy that worked for decades may no longer be suitable for today’s retirees. Advisors who insist on a blanket “stay the course” approach fail to recognize the unique challenges that retirees face in today’s economic landscape. Adapting to a changing market environment and prioritizing stability over growth can be a more prudent strategy. This is especially true for income investors using the systematic withdrawal plans (SWP), where shares of mutual funds are sold to provide income. Spending true income from interest and dividends is a much safer way to have predictable and sustainable income, but unlike mutual fund SWPs, this often takes research and professional help.
A Thoughtful Exit, Not a Panic Sell
To be clear, exiting the stock market does not mean liquidating all assets overnight in fear of a crash. Instead, retirees should approach this transition strategically. Gradually shifting from stocks to safer investments, adjusting withdrawal strategies, and creating a diversified income stream can provide financial security without the emotional rollercoaster of market swings.
Financial advisors who advocate for retirees to stay fully invested in the stock market may be clinging to outdated strategies that do not account for the unique risks facing today’s retirees. While no investment strategy is entirely risk-free, shifting away from equities can provide retirees with the peace of mind and financial security they deserve.
At the end of the day, the most important factor is ensuring that your money lasts as long as you do. For many retirees, stepping away from the stock market may be the smartest move they can make to secure a stress-free and comfortable retirement.