Keep a generous amount of your savings in the stock market, but make stocks only part of your retirement income plan to manage the risks.

Gambling can be a fun little pastime between friends — or a disaster.

There’s a difference, for example, between losing a $100 bet on your favorite NFL team and running out of money at age 90.Over the long term, stocks outperform bonds. So, stock market investments should be one component of a plan you use to prevent your savings from running dry before the end of a retirement that can last 20 or 30 years or longer.

Some of the planning advice you might get about how to allocate your savings, however, may not fully address the risks of these investments. And the amount of savings itself will not guarantee your retirement.

Don’t bet in Monte Carlo

Many planning projections predict how long your savings will last based on Monte Carlo simulations. While providing you with probabilities of success or failure, they fail to:

• Recognize that investors do not achieve average market returns
• Consider financial behavioral changes when withdrawing capital
• Reflect substantial late-in-retirement expenses
• Maximize after-tax income or legacy and plan separately for qualified and after-tax accounts
• Consider lifetime annuity payments as a key source of income

To illustrate the first point, my article YOU Are the Biggest Threat to Your Retirement Plan, suggests that some investors find it difficult to maintain their positions in volatile markets. And studies show that investors lose 1% to 4% on their returns when they are not in the stock markets. This could mean five or more years in lost income.

For this and other reasons, one expert in the field, Wade Pfau, said, “Monte Carlo simulations communicate false safety.”

How to increase your odds of winning

To start, I recommend that everyone who intends to keep a significant portion of retirement savings in the stock market create a personalized plan for retirement income.

And to increase your odds, here are four tips to consider in your planning (more on each below):

• Add lifetime annuities to the mix so your income doesn’t run out
• Use a high-dividend stock portfolio for current income from personal savings and a balanced portfolio with stocks and bonds for IRA withdrawals
• Use a conservative estimate of long-term stock market performance in your planning
• Build in a monitoring and replanning process that enables you to adjust your plan in real time to market conditions and life events

With this approach to your planning, we can change our thinking and consider our stock investments as part of an informed plan, not as a gamble.

1. Add lifetime annuity payments

These add safety to your portfolio. They come in different flavors, but the “plain vanilla” version is purchased from a life insurance company at a fixed rate and sends you monthly payments for the rest of your life. You might decide to start payments at various times as you anticipate inflation, health care or other large costs.

Many advisers don’t understand or offer annuities, but 90% of retirees with annuity payments as part of their retirement income feel more confident about their retirement plan. Over the past 18 months, annuity payments available on new purchases have increased by 25% to 45%. It’s a good time to consider them.

2. Use a high-dividend stock portfolio

Pick stock portfolios, whether ETFs, mutual funds or managed accounts, that help to support the income goal, manage risk and lower taxes. Here are two portfolios to consider:

• High-dividend stock portfolios. Some stocks are historically less risky than others. High-dividend equities, invested in companies that have shown stability and a willingness to return profits to their stockholders, don’t usually boast skyrocketing share prices in the tracking indexes. But they do produce those reasonably predictable dividends that you can spend on whatever you want, and the right portfolio also shows increasing income. Investing from your personal savings gives you some tax benefits.
• Balanced portfolio. Another portion of your savings can then be invested in a portfolio within your IRA that is balanced between bonds and stocks. When you’re 73 (the age rises to 75 in 2033), the IRS will begin to ask for the taxes that you didn’t pay as you built your retirement savings. Those required minimum distributions (RMDs) will have less market risk if withdrawals can be split between stocks and bonds. Rebalancing your portfolio by selling stocks to buy bonds, for instance, also comes with a tax advantage when it occurs within your IRA because market performance is tax-deferred until you withdraw money.

3. Use a conservative estimate of stock market returns

When you take it slow and easy, you’re less likely to be disappointed. The markets have had many ups and downs over the past few years. Some were scary, some were exhilarating. Stick to the middle range and plan for other income sources that can make up losses as the market roller-coaster ride continues. We provide plans based around 8%, 6% and 4% stock market returns — which have been achieved by a broad-based stock index in 50%, 70% and 90%, respectively, of long-term market periods.

As a standalone investment, that index returning 4% per year would accumulate in 25 years to just 39% of the value at 8% per year. However, a Go2Income plan with stocks returning 4% for 25 years — and employing the tips suggested above — would deliver 88% of the cumulative income for plans assuming 8%.

4. Build in a monitoring and replanning process

No matter how diversified your portfolio or how smart your adviser, you can’t avoid some market volatility. While including lifetime annuities and other guaranteed contracts, it’s important that you adjust your plan by reviewing your allocation, and setting your inflation expectation on your plan income.

I wrote about this approach in my article Has Bad Economic News in 2022 Hurt Your Retirement Plans?, which addressed the impact of falling stock and bond prices in 2022 on our sample investor’s plan income. While the investment portfolio fell 20%, her plan income dropped only 9%, and she could eliminate that decrease by assuming a lower inflation rate going forward.

Every scenario is unique, so that’s why monitoring and replanning makes sense.

A little bit of research will show how to create a plan that will provide growing and guaranteed income during retirement even in worst-case scenarios. Most of the time, you can also meet other objectives, like legacy goals and caregiver costs.

Visit Go2Income, answer a few simple questions, and start testing a plan that gives you a starting income and suits your specific needs. It’s easy, and our support staff will be available to help you through the process.