Dear Penny: Should I Cash Out of Stocks at 57 to Protect My Life’s Savings?

Dear M.,

It depends on what you mean by “keep more in cash.” It’s painful to watch money evaporate from your investment accounts. That’s especially true when retirement is finally in sight — though these days, “Should I cash out?” is a question I’m getting from readers of all ages. But unless you’re facing a dire necessity, I wouldn’t cash out investments right now.

The most obvious reason is that the stock market is down about 20% year to date as of late October 2022. Your fear is that you won’t be able to recoup your losses. But until you sell, any losses you’ve already incurred only exist on paper. Should you cash out now, you’d guarantee that your investments will never rebound.

A less-discussed reason is that there’s a risk in having too much of your retirement savings in cash. People approaching retirement often worry that a crash could derail all their careful planning, and rightfully so. But at 57, you could easily live another three or four decades.

Even after you retire, you need your money to continue earning money. If a large chunk of your retirement money is in cash or other low-risk, low-return investments, you may need to withdraw substantially more than your money earns. At that point, running out of money becomes a real concern.

Building up more cash savings is a great goal. That way, you have a cushion for your retirement years. The worst-case scenario is a prolonged bear market that hits once you’ve already retired. If you don’t have liquid savings and you’re living off your investments, a downturn is a financial nightmare. You’re forced to withdraw from depleted investments that never get the opportunity to rebound.

When you’re still working, you typically want at least three to six months’ worth of liquid savings on hand. But when you’re preparing for retirement, you should up this target. Ideally, you’d have two or three years of savings. That may not be realistic for a lot of people, but any extra cash you can save provides a valuable buffer.

If you have a decent amount of disposable income, you could try scaling back on non-essentials to build your cash savings and keep investing as usual. But if that’s not an option, I’d keep maxing out your contributions to your employer-sponsored plan to milk the tax advantages and invest less in your brokerage account.

It’s also worth it to meet with a financial adviser to review your asset allocation, even if it’s just a one-time engagement. You probably don’t want to do significant rebalancing while the market is still down. But you could work out a strategy to start moving your money into safer assets once the market recovers.

Keep in mind that investing is only one part of retirement planning. A little flexibility can go a long way. For example, if you’re in good health and your job is stable, you may want to work a bit longer than you’d planned. That gives your money more time to rebound. Plus, that can help you hold out for more Social Security, which can help fill the void when the stock market takes a dip.

Even though it’s scary when the stock market poses a threat to your retirement, it helps to put things in perspective. The average bear market — defined as a 20% or more drop from peak to bottom — lasts less than 10 months. More importantly, the stock market has always rebounded from its losses. So try to ignore the daily fluctuations in your 401(k) balance and check in once a month or quarter instead.

Probably the hardest part of protecting your retirement savings is that we naturally want to take action when the market is down. But that’s precisely the opposite of what we should do. A hands-off approach is best when things are bad. Then, you need to have the discipline to take action, by rebalancing or selling off, when the market is strong, even if that means forgoing potential returns.

Don’t take any major actions based on the latest stock market news. But do make it a goal to gradually save more cash while also continuing to invest. The stock market can be a scary place to keep your money in the short term. But in the long run, it’s a pretty reliable generator of wealth.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected],