Should You Exit the Stock Market?

Jane Bryant Quinn November 2015

This article appears at the following website: aarp.com

Ask yourself these four questions before moving your money.

Should the portfolios of older investors include stocks, and if so, what percentage? The issue comes up every time stock prices wobble or fall. If you're in your 70s or 80s, how safe does your money have to be?

In part, the answer depends on your circumstances and temperament. But there's one rock-bottom rule: You need to feel sure that, whatever happens to stock prices, you'll be able to pay your basic bills. Assuming that you have savings to invest, there are several things you might consider.

Does the stock market make you anxious?

If it does, forget about it and use some savings to buy immediate-pay annuities. You'll get a guaranteed income for life and will never have to think about stock prices again. To see how much an annuity would pay, go to immediateannuities.com. The monthly amount will almost certainly exceed what you'd get from high-quality bond funds. Money that is not in the annuity could go into bank savings or CDs so you'd have extra cash on hand.

Do you have enough money from other reliable sources to cover your lifetime needs?

If you've got enough money from your pension, Social Security and other investments, owning stocks is optional. "You've won the game, so you don't have to play anymore," says Larry Swedroe, director of research for the BAM Alliance of wealth managers and author of many personal-investment books. You might want to keep a high percentage of your savings in stocks for the benefit of the next generation, or a low percentage in case your circumstances change. Either way, the investment needs to pass the "stomach-acid" test, Swedroe says. You have to feel safe enough to not feel sick in years that prices plunge.

Do you have savings but need to grow them to provide for your later age?

Well, if so, that's what stock investments are for, says Judith Ward, a senior financial planner for the mutual fund group T. Rowe Price. At 75, you could live another 15 or 20-plus years, which historically gives the market time to rise in price. The firm recommends at least 20 percent in stocks, with the rest in bonds. Over the past 15 years, that mix of investments lost money in only one year (the loss was just 3 percent), measured by standard stock and bond indexes. For more growth, you might go to 40 percent stocks.

How do you stay "safe" when you have money in stocks?

"Put aside some money for now and other money for later," says financial planner Judith Lau of Lau Associates in Greenville, Del. "Now" means cash — enough to pay your bills for two years. For example, say that Social Security pays you $1,300 a month and you're spending $2,300. The difference is $1,000 a month or $12,000 a year. You buy two years of safety with $24,000 in the bank.

"Money for later" comes in two parts. The first part holds reasonably safe investments, such as short-term bond funds, that could pay your bills for three years. You're now safe for five years, no matter what happens to stocks. The second part comprises stocks and stock funds for longer-term growth. Every year, you sell some of your stock funds to replenish your two-year cash reserve.

That's the theory, anyway. Stress-test your choice by asking if you'd be OK if stocks fell 50 percent before rising again. That's the stomach-acid part.