Stocks

Why it matters in retirement

Over the past 95 years, US stocks have delivered roughly 10% nominal / 7% real annualized returns — the most reliable way to grow purchasing power faster than inflation. Even a conservative retiree typically needs meaningful stock exposure to avoid running out of money over a 25–30 year retirement.

A Deeper Look

When you buy a share of stock, you become a partial owner of that company. If the company has 1 billion shares outstanding and you own 100, you hold a tiny but real piece of everything the business owns: its factories, intellectual property, cash reserves, and future earnings. Your return comes from two sources. First, the stock price may rise as the company grows earnings or the market revalues those earnings higher. Second, many companies distribute a portion of their profits to shareholders as dividends, typically paid quarterly.

Stocks are broadly categorized by size, style, and geography. Large cap stocks are companies worth roughly $10 billion or more, and they make up about 80% of the US market by value. Mid caps ($2 billion to $10 billion) and small caps (under $2 billion) tend to be more volatile but have historically delivered slightly higher long term returns. Growth stocks reinvest most of their earnings to expand, while value stocks trade at lower prices relative to their earnings and often pay higher dividends. You will also see domestic versus international as a key distinction, and holding both reduces concentration in any single economy.

The mechanics of buying stocks are straightforward in 2026. You open a brokerage account, place a market or limit order, and settlement happens in one business day (T+1 since 2024). There are no commissions at most major brokerages. You can buy fractional shares, meaning you do not need thousands of dollars to own a piece of a high priced company.

For retirees, the critical question is how much of your portfolio should be in stocks. A common starting framework is your age in bonds and the rest in stocks, but this oversimplifies. What matters is your spending rate and your time horizon. If you spend 4% per year and your portfolio needs to last 30 years, historical data shows that a portfolio below 40% stocks actually has a higher chance of running out of money than one at 50% to 60% stocks. The reason is intuitive: bonds alone cannot grow fast enough to outpace inflation plus withdrawals over three decades.

Consider a real world example. Suppose you retire at 65 with $800,000 and withdraw $32,000 per year, adjusted for inflation. A portfolio of 50% US stocks and 50% bonds has survived 30 years in roughly 95% of historical periods. Drop the stock allocation to 20% and the survival rate falls to about 75%. The stocks are doing the heavy lifting on long term purchasing power.

The biggest risk stocks pose to retirees is sequence of returns risk. If the market drops 30% in your first year of retirement, your withdrawals come out of a smaller base and the portfolio may never recover. The solution is not to avoid stocks but to pair them with two to three years of spending in bonds or cash so you never have to sell stocks at a bad time. This is sometimes called a "bucket strategy," and it lets you keep enough in stocks for long term growth while protecting near term income needs.

When evaluating stocks for your portfolio, focus on broad diversification through index funds rather than picking individual companies. A single company can go to zero; a diversified index fund cannot. Look at the expense ratio, the number of holdings, and whether the fund covers large, mid, and small caps. For most retirees, a total US stock market index fund and a total international stock market index fund provide all the equity exposure you need.

Common mistakes

• Owning individual stocks instead of low-cost index funds
• Selling during corrections and buying back after recovery
• Confusing dividend yield with total return
• Not rebalancing — letting winners become a concentration risk