I'm About to Retire. Is It Time to Sell My Stocks?

The stock market can be volatile in the short term. That's not a big deal when you're early in your career and can afford more risk. But when you're nearing retirement, the idea of a bear market is a lot scarier since your money has less time to recover.

So if you're about to retire, should you cash out all the stocks in your brokerage account? Not so fast.

Why you shouldn't sell all your stocks before retiring

You typically don't want to sell off all your stocks ahead of retirement. You'll still need your investment portfolio to generate returns that are high enough to keep pace with inflation over what could be a 20- or 30-year retirement. Otherwise, you risk running out of money. Stocks are a lot more likely than bonds and cash equivalents, like certificates of deposit (CDs), to produce inflation-beating returns.

But you do want to take a look at your asset allocation and possibly shift to more conservative investments. For example, if you've invested primarily in stocks most of your life, you may decide to keep 60% of your portfolio invested in stocks while investing the remaining 40% in U.S. Treasuries and other low-risk investments. 

You could hire a financial advisor if you want a personalized strategy. But if you don't want to hire someone, click here to review our top robo-advisors. 

A robo-advisor uses algorithms to suggest a portfolio based on your age, goals, and risk tolerance, and gradually rebalance your money over time. Many robo-advisors also offer a hybrid model that includes some access to a human financial advisor.

An alternative to cashing out of the stock market

Many financial advisors recommend retirees use something called the bucket strategy to manage investment risk in retirement. Basically, you separate your investments into three different "buckets" based on your time horizon. Here's how it works.

Bucket No. 1

The first bucket consists of cash and cash equivalents, like cash and low-risk investments like money market funds and CDs. You'd want to keep enough in Bucket No. 1 for at least a couple of years of short-term needs. For example, this bucket might consist of six months' worth of savings in a high-yield savings account for emergencies, plus two years' worth of expenses invested in CDs.

Bucket No. 2

The second bucket contains medium-risk investments and is intended for your needs several years into the future. You could invest this bucket in high-quality bonds and some low-risk stocks, such as those that consistently pay dividends.

Bucket No. 3

The third bucket consists of high-risk investments, primarily stocks. Money in this bucket is reserved for long-term needs, often eight to 10 years into the future. 

This bucket provides the potential growth your portfolio needs for a retirement that could easily stretch several decades. But because you have money for your short-term needs invested in lower-risk assets, the money in this bucket has time to recover if the stock market tanks.

The worst time to sell stocks

Whether you're getting close to retirement or plan on working for another couple of decades, make sure you take a look at your asset allocation from time to time and rebalance as necessary. You'll want to do this when the stock market is healthy. The worst thing you can do is decide to rebalance in a panic after a rough spell in the market when your money hasn't had a chance to rebound.

Investing in stocks carries risk, but NOT investing in stocks also comes with the risk that your money will lose purchasing power over time. Stocks have a place in most investors' portfolios, even in retirement.