Should You Invest in the Market During Retirement?

Retirement may be a time to relax and enjoy life without job commitments. However, it’s not the time to put your investments on auto-pilot.

You’ll want to stay on top of your investment strategy to ensure you don’t run out of money in retirement.

Define Your Retirement Investment Goals

The first thing you’ll need to consider are your investment goals in retirement. Since you won’t be working, you’ll need a plan for how you’ll cover your essential and discretionary expenses. You’ll also want to prevent your money from running out.

For most retirees, that means continuing to invest in a way that provides income and keeps their wealth growing—while preserving their capital.

Another goal should be to define the risk you can tolerate in your quest to increase the value of your account(s). Less aggressive investing usually means less risk of losing money, but a lower return.

Your risk tolerance in retirement can help you determine the right asset allocation for your portfolio.

“In retirement, your money needs to do three things: generate income to cover living expenses now that paychecks have stopped, preserve capital because your hard-earned nest egg must last for decades, and manage risk,” says Alvin Carlos. a financial planner and managing partner at District Capital Management.

“You don’t want to be in a situation where you are forced to sell at a loss during a stock market downturn.”

The Case for Investing During Retirement

As noted, keeping your money invested throughout your retirement years can generate income that you’ll need and increase the value of your savings.

“Staying invested helps your money keep working for you. A good portfolio provides income through dividends and interest, while also offering growth to fight inflation and extend the life of your savings,” Carlos advises. “Retirement can last 30+ years.” 

Review Your Asset Allocation

Having an asset allocation of stocks and bonds is a good way to structure your retirement portfolio.

“It’s really important to remain invested in the market during retirement, having a balance of both stocks and bonds,” says Carla Adams, a certified financial planner and founder of Ametrine Wealth.

“Keeping your portfolio in all cash and/or bonds throughout retirement will cause you to lose purchasing power over time due to inflation. You need your portfolio to continue to grow to provide a steady, inflation-adjusted cash flow stream in retirement. I view stocks as providing growth in the portfolio and bonds as providing stability in the portfolio.”

Focus on Index Investing

Passive investing is usually a good strategy at this stage of life. In contrast, actively trading stocks may involve too much market volatility and thus be too risky for people who don’t have the time horizon to recover from losses.

“Passive investing involves the use of low-cost index funds. It is usually the best fit for retirees. It’s simple, cost-effective, and reduces the risk of emotional decisions,” Carlos says.

“Active trading involves constantly buying and selling individual stocks or funds. It’s time-consuming, stressful, and often leads to underperformance.”

Rebalance Your Portfolio

In addition, at least once a year, retirees should take the time to rebalance their investment portfolios (or to make sure that an account representative handles it for them).

“Rebalancing is like a tune-up for your portfolio. It keeps your investments aligned with your goals. In a standard rebalance, you sell investments that have risen in value and buy ones that are underperforming,” Carlos says.

“It can be counterintuitive, but it works. It prevents your portfolio from deviating too far from your original target.”

In other words, adjust the securities in your portfolio to the right value mix of equities and fixed-income securities so that they continue to meet your investment goals of appropriate risk, income generation, preservation of capital, and growing account value.

If necessary, don’t hesitate to get help with your rebalancing from a financial advisor.

Pros and Cons of Active Trading

Active trading in retirement may keep you in the market, but it comes with risks, including choosing the wrong stocks and losing money.

“If you bet too much on one investment and it doesn’t work out, you can experience a massive loss in your nest egg,” Carlos says. “Losses in retirement are harder to recover from, especially if you’re regularly withdrawing money.”

To guard against these kinds of losses and their consequences, if you must trade actively, do so with a limited amount of your money.

“Active trading may appeal to engaged retirees but introduces volatility and requires more oversight,” says Daniel Milks, a certified financial planner and founder of Fiduciary Organization. “It’s usually best kept to a small portion of the portfolio, if at all.”

Taxes During Retirement

On Trading

Taxes can diminish the money available to you in retirement. So, if you decide that active trading is for you, you’ll want to be aware of taxes.

“Frequent trading in taxable accounts may trigger short-term capital gains, taxed at your regular income rate,” Carlos advises.

“That’s why we love Roth IRAs: no taxes on dividends, no capital gains taxes. Your money grows tax-free in a Roth. They’re a powerful tool in retirement planning.”

If you have a Roth IRA, consider using it for trading purposes (or converting another retirement account to a Roth if you don’t, just for the overall tax benefits).

On Withdrawals

But there are taxes to worry about with other types of retirement accounts. As you reach your 70s, you’ll face required minimum distributions from either a traditional IRA or 401(k), or both, and you’ll pay taxes on each withdrawal.

“The one thing you will need to understand is traditional IRAs and 401(k)s will eventually be subject to required minimum distributions (RMDs). RMDs currently start at 73, but for those born in 1960 or later RMDs will start at 75,” says Mike Hunsberger, a certified financial planner and owner of Next Mission Financial Planning. 

Tapping out these accounts early in your retirement years is one way to avoid RMDs in your 70s and the taxes that come with them.

But no matter when you withdraw these retirement account funds, you’ll owe taxes on them. So, timing withdrawals and deciding which accounts to take them from can be important.

“Managing withdrawals or Roth conversions early in retirement can be a great way to avoid having to take increasing annual withdrawals from your traditional accounts that could drive large tax bills later in life,” Hunsberger says.

The other thing to bear in mind is that withdrawals may add to your annual income, potentially pushing you into a higher tax bracket. That can have an impact on taxes that you may owe on your Social Security benefits.

The Bottom Line

Staying invested in the stock market throughout your retirement years is a must for most retirees. Doing so can help you guard against the negative effects of inflation, generate income, increase the value of your investment accounts, and preserve capital.

What should you invest in? Consider a mix of stocks and bonds that matches your tolerance for risk. Low-cost index funds and ETFs can offer a convenient, hands-off investing strategy and asset allocation solution.

In addition, maintain a tax-efficient withdrawal strategy and keep your investments aligned with your retirement goals by rebalancing them at least once a year.