Why ‘Playing It Safe’ in Retirement Can Cause Money Trouble

Investing in the stock market can seem risky compared to keeping your money in certificates of deposit (CDs) and high-yield savings accounts. However, playing it safe with cash and cash equivalents may not be the best strategy for retirement planning. While stocks can be volatile, there are risks associated with keeping all your money on the sidelines as well.

High-yield savings accounts and CDs have their place in a retirement portfolio, but they may not keep up with inflation like riskier assets can. Even if the annual percentage yield (APY) is slightly higher than the rate of inflation, the interest earned is taxable income. Over time, inflation quietly erodes your purchasing power, making it essential to consider the opportunity cost before going all-in on cash.

In addition to inflation, you also want your portfolio to grow to cover long-term goals and unexpected expenses in retirement, such as increased healthcare costs. While it’s important to have a balanced portfolio that includes growth-oriented assets, retirees shouldn’t go all-in on stocks. Gradually reducing stock exposure as you age is wise, but having assets that can beat inflation is crucial. Precious metals like gold can be valuable supplementary investments to achieve this objective.

The key to a successful retirement portfolio is balance. You need a mix of protection and growth assets to avoid losing money to inflation and to mitigate the risk of a stock market downturn. Financial advisors typically recommend keeping enough cash on hand to cover living expenses for three to six months, increasing that to one to two years’ worth in retirement. The optimal mix of stocks, bonds, and other assets will depend on your risk tolerance, financial situation, time horizon, and goals.

For example, Charles Schwab suggests a portfolio allocation shift as you age. People aged 60-69 may have a moderate portfolio of 60% stocks, 35% bonds, and 5% cash or cash equivalents. By age 70, this could shift to 40% stocks, 50% bonds, and 10% cash, and by age 80, a conservative portfolio of 20% stocks, 50% bonds, and 30% cash may be more suitable.

In conclusion, while it may seem less risky to stick with cash and cash equivalents, it’s important to invest some of your money to beat inflation and achieve long-term growth in retirement. Finding the right balance of assets in your portfolio is key to a successful retirement strategy.