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Should You Own Stocks in Retirement?

Historically, stocks have earned significantly higher returns than less volatile investments like bonds, cash, and CDs. And that makes sense–their higher volatility should be compensated in the form of higher expected returns.

What I find particularly interesting is that, despite the additional expected return that stocks get you, they don’t really allow you to (safely) increase your retirement spending by very much–at least not in the early part of retirement.

“Safe” Withdrawal Rates

The withdrawal rate figure most often suggested for a 30-year retirement using a typical stock/bond portfolio is 4%. That 4% withdrawal rate isn’t exactly bulletproof though. For example, as researcher Wade Pfau recently explained, while the 4% rule has worked reasonably well in the U.S., it’s had significantly worse results in other developed economies:

“In the years since 1926 and for a 50/50 asset allocation, the 4% rule would have failed retirees in 10 of the 17 developed countries more than 25% of the time. Remarkably, the 4% rule would have failed more than 70% of the time in Spain and Italy.”

In contrast, consider a hypothetical, very low-risk portfolio (consisting primarily of TIPS, with some short-term Treasuries and CDs thrown in the mix). If that portfolio can earn a zero percent real return every year (that is, it matches inflation but never surpasses it), it would safely fund a 3.33% inflation-adjusted withdrawal rate over 30 years (because 100% ÷ 30 years = 3.33%).

That’s only 0.66% lower than the not-entirely-safe 4% withdrawal rate from a portfolio that allocates a significant amount to stocks.

What About Annuitizing?

If we throw a lifetime annuity into the mix of the low-risk portfolio, the gap gets even smaller. Based on Vanguard’s quote provider, even with today’s low interest rates, a married couple (both age 65) could get a single premium immediate lifetime annuity (with inflation adjustments and a 100% payout for the surviving spouse) with a payout of 4.25%.

If we assume half the portfolio is allocated to such an annuity and half is allocated to the other low-risk investments discussed above, that would allow for a withdrawal rate of 3.79% (the average of 4.25% and 3.33%). That’s pretty darned close to 4%, and we haven’t allocated a dime to stocks or other high-risk investments.

So Why Would Anyone Own Stocks in Retirement?

While allocating a part of your retirement portfolio to stocks doesn’t dramatically increase the amount you can spend each year at the beginning of retirement, it does get you two things:

  1. The possibility of higher spending in the later stages of retirement, and
  2. The possibility of leaving a big pile of money to your heirs.

For example, with a significant portion of your portfolio allocated to stocks, you might find that after 15 years of retirement, your portfolio has actually grown in inflation-adjusted value to twice its original size (something that just wouldn’t happen with a portfolio comprised exclusively of super-low-risk investments).

At that point, with 15 fewer years remaining and a larger portfolio than you started with, you can probably safely increase the rate at which you’re spending. Alternatively, you could keep your rate of spending the same in order to leave a large inheritance to your kids or other loved ones.

In other words, the compensation for taking on risk by including stocks in your retirement portfolio isn’t that you automatically get to spend a great deal more from the outset of retirement. The compensation is that you might get to spend a great deal more during the later stages of retirement.

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  1. El Conquistador says

    Thanks for the article! A couple of comments which I believe you allude to, but don’t explicitly say.

    1) The old 4% is based on an assumption that a portfolio returns more than 4%. In theory (and a lot of people have rethought this theory looking back on the last decade’s returns) with a healthy allocation of stocks and bonds, one should be able to return much more than 4%, keeping the principal untouched and adjusting for inflation. It is NOT based on assuming one (or a couple) has 25 more years to live–which is the impression I get from reading the top of your post.

    2) The timing of when one retires has a huge impact. Someone who retired in the mid 90’s and followed the 4% rule with a well balanced portfolio will have fared much better than someone retiring in 2009. C’est la vie!

    3) How much additional risk does one take on with a 40/60 (stock/bond) or 50/50 allocation compared to a 0/100 allocation? Just as I can’t live without bonds (and I’m under 30 years old), I can’t imagine living without equities.

    Thanks again for the post. I enjoy reading your stuff.

  2. El Conquistador,

    Regarding your point #1, my understanding is that the often-cited inflation-adjusted 4% withdrawal rate does not come from any specific assumptions about returns. Rather, it was initially the result of the “Trinity Study,” which contemplates historical success rates of withdrawals over periods of 15-30 years.

    Agreed on points 2 and 3.

  3. “While allocating a part of your retirement portfolio to stocks doesn’t dramatically increase the amount you can spend each year at the beginning of retirement . . . . ”

    Mike, related to El C’s point 2, this particular statement puzzled me. Wouldn’t it be true that if one retired at the start of a bull market, your SWR could be higher than if you left work at the start of a bear market?

    I found all of Wade’s recent comments most interesting, btw, and want to follow up later with a post addressing them.

  4. “Wouldn’t it be true that if one retired at the start of a bull market, your SWR could be higher than if you left work at the start of a bear market?”
    Yes. I’m not sure I understand how that’s in contradiction to the statement you quoted though.

    If you retired at the beginning of a bull market and you somehow knew you were at the beginning of a bull market, then yes, allocating more of your portfolio to stocks would allow you to safely increase the amount you could withdraw per year at the beginning of retirement.

    Without the ability to successfully make such a prediction though, I think the only reasonable thing to do is set your initial withdrawal rate low enough that it’s not reliant upon a bull market in the near future.

  5. I understand what you’re saying there; i.e., start at a conservative rate as it’s always safer to underwithdraw than overwithdraw. But you seemed to be saying that owning stocks in retirement was potentially advantageous only in the later stages of retirement, which I would take to be 10-15 years in. Whereas I would think that if you’re in a bull market, you would know that within a year or two, no matter when you began your retirement.

  6. Even with a couple years of good returns, I do not think I’d be comfortable bumping up the withdrawal rate significantly after just two years. (Of course, other investors might be more comfortable doing so, and it could turn out well for them.)

    Caveat being: If, after a couple years of good returns, you shifted a significant amount out of stocks and into long-term TIPS and/or lifetime inflation-adjusted annuities (and they offered rates high enough to support it), I could see increasing the rate of withdrawal (as measured as a percentage of the initial portfolio).

  7. El Conquistador says

    I believe the 4% rule originated with Bengen in the early 90’s in some journal, in which he was attempting to answer the question, “What withdrawl rate can one have to preserve capital and still keep up with inflation?” My implication is the 4% SWR is based on preserving principal AND keeping up with inflation, not assuming one will live for 25 more years. My shaky understanding is Trinity tracks allocations and probabilities of success for SWR’s.

    On another note, it isn’t always about having a larger return in a bull market. One could always stick to their plan, bank the returns and increase the probability of their plan being successful (which, in a roundabout way, is what this post is about). Or something in between.

    Of course, no one has mentioned the impact of the “great returns” from a bull market if one is in bonds only.

    Cliff notes of my rambling: have a plan, own both bonds and equities, rebalance, and stick to the plan (barring MAJOR emergencies).

  8. El Conquistador,

    I believe this is the Bengen article in question. At the risk of sounding argumentative, I don’t think Bengen focuses on preserving principal (i.e., keeping it above 100% inflation-adjusted original value). Rather, it appears that, like the Trinity Study, he focuses on not-depleting principal (i.e., keeping it above 0% inflation-adjusted original value) given various assumptions about life expectancy.

    All of that said, and regardless of whether we end up agreeing on the above topic, I agree entirely with your conclusion: “have a plan, own both bonds and equities, rebalance, and stick to the plan (barring MAJOR emergencies).”

  9. Hi Mike,

    I really enjoy both your blog and the depth you provide in your articles, so keep up the good work! I’ll have to buy your book one of these days as well.

    The main reason I would want to hold stocks in my portfolio for retirement, is of course “dividend income” as well as the potential for capital appreciation. Even in declining markets, or during the financial crisis, the majority of dividend paying stocks continued to pay dividends. That’s a 3% to 4.5% yield. It goes without saying that should be kept within a responsible asset allocation. But there are dividend investors out there who are retired and living off a 100% dividend stock portfolio.

    What’s your view on that ?

  10. Hi TDN.

    Another reader just asked a very similar question. I guess it’s a popular topic. 🙂

    If a company pays a dividend, the investor has the option of reinvesting it in shares of the company (i.e., pretending no dividend occurred). If a company doesn’t pay a dividend, the investor has the option of creating an artificial dividend by liquidating a percentage of his shares. As such, potential tax implications, transaction costs, and hassle aside, it doesn’t matter whether the returns come in the form of dividends or capital gains.

    In other words, from the perspective of an individual investor, the payout of a dividend or lack thereof is irrelevant unless the dividend yield offers some predictive value.

    Given that, I believe the question of whether or not dividend yield affects the safe withdrawal rate boils down to two sub-questions:

    1. Do high-dividend stocks earn higher total returns than low-dividend stocks?
    2. Do high-dividend stocks have less volatile total returns than low-dividend stocks?

    A few searches on SSRN don’t easily turn up a research-backed answer to either question. (Nor, to the best of my knowledge, do I have access to data that could answer either question.)

    If I had to guess, using “value” as a stand-in for “high-dividend,” I’d guess that the most likely answers are “yes” and “no,” respectively.

    In general, I’ve yet to see any research indicating that high-dividend stocks are any sort of “free lunch” in the form of higher returns without correspondingly-higher risk. For example, as Larry Swedroe has shown in several places (his Moneywatch blog, for instance), using a high-dividend stock strategy has historically been less successful than other “value” strategies.

  11. Hi Mike,

    Regarding your first paragraph I argued this point explicitly in a previous blog post. I pointed out that if you kept your capital intact, and chose not to liquidate any shares, then you would be living off your dividend yield:

    However I think most investors would not have enough capital to be only able to live primarily off their dividend income (or interest income for that matter).

    Regarding your two questions, there is definitely no free-lunch with any investment. My lowest dividend payers actually have the highest ROI. My highest dividend paying stocks have the lowest ROI, I believe the share value declines as the dividends are paid out over time, since the Dividend-Payout-Ratios are higher. So I can see why Larry Swedroe would come to that conclusion.

    Dividend Ninja

  12. Why not convert the entire portfolio to a single premium immediate lifetime annuity. Assuming that one does not wish to leave the money to anyone after dying; is there any risk in this strategy?

  13. John: You’re right that as “bequest motive” decreases, annuitizing certainly becomes more attractive. That said, there are a couple concerns.

    First, there’s credit risk. Annuity providers are insurance companies, so that risk isn’t exactly high. But it’s still there. And as you annuitize more, it might become more difficult to stay under the limit for your state’s guarantee association.

    The second reason not to annuitize everything is that it’s important to maintain some degree of liquidity. Retirees with non-annuitized portfolios don’t usually need a dedicated “emergency fund,” because they can just sell whatever part of their portfolio is currently overweight if they have to raise cash unexpectedly. That’s not possible if you’ve annuitized your entire portfolio.

  14. One of the great ironies of life is that when you include stocks in your retirement portfolio, you have to use a low withdrawal rate to be safe. You can’t spend your money when you are most able to enjoy it. But, more often than not, your wealth will grow quite dramatically as you become very old and have a much harder time enjoying spending it.

    Larry, are you the same Larry from February who mentioned my “safe savings rate” article to Mike? Mike mentioned a new article of mine in his latest Investment Blog Roundup:

    which actually makes efforts to answer your question from before about how to use the concept for someone already in mid-career.

    Mike, your blog is very interesting and inspiration for how to communicate investment ideas in plain English!

  15. I forgot to mention, El Conquistador, that Bengen’s research wasn’t about how to preserve your principal. From his 1994 article, he showed that the 1966 retiree using a 4.15% real withdrawal rate would have ran out of wealth after 30 years. This is where the idea of the 4% rule comes from. Nonetheless, using 4%, more often than not, you will have still preserved your initial principal after 30 years. This is a side effect though, not the main intention.

  16. mojodallas says

    I came across your blog while looking for retirement advice. I have about five years until I retire and I am starting to change my approach to investing. Up to this point I have been accumulating wealth, but, now I find myself thinking about how to make the money last.

    I have read often of the 4 or 5% withdrawl rule and can see where it make’s sense when talking about more fixed income related investments. It seems to me the best way to approach all this is to bucket up your money and apply strategies to the various buckets. What I have seen associated with this theory is the the buckets farther in the future are the one’s you can take greater risk and therefore potentially get a better return.

    I have noticed, as I have gotten older, I am getting more leary of leverage of any type. So, the new leveraged ETFs that I probably would have favored if they had been around 20 years ago, now scare me.

    So, how do you feel about bucketing?

  17. Mojodallas,

    I think “bucketing” can be a helpful mental accounting tool in that it can often be easier to determine appropriate asset allocations for a few sub-portfolios (each intended for a specific time period) than for one larger portfolio.

  18. Timothy Wright says


    I plan to own about 70% stocks and 30% Bonds. I have about 12 years till I retire and my yield on cost of the dividends will be much lower in 12 years. The stocks I own are Pep, KMP, PG, KMB, OKS, Vod, TEO, to name a few. These stocks all keep place with inflation

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