Time for retirees and near-retirees to cash in stocks?

Retire Well: Hold onto your stocks or sell now?
Retire Well: Hold onto your stocks or sell now?

With markets near record highs, should retirees take their money and run?

U.S. equity markets have had several years of substantial growth without a major downturn. The S&P 500 stock index has not experienced a correction (or 10 percent decline) since April 2011. At the same time, retirement balances are hitting new records. Fidelity reports the average 401(k) balance grew to $91,800 at the close of the first quarter of 2015 and the average IRA balance topped $94,000.

Some retirees—or those who are near retirement—may wonder if now is the right time to move money out of stocks.

Yet financial advisors usually dissuade older clients from changing asset allocations based on short-term market moves. Instead, many advisors suggest retirees take these three steps:

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Step one: Always have a chunk of your investment portfolio in cash. How much? "For retirees living on their portfolio, we make sure to leave a good amount—three to six months' or even one year's worth of expenses in extremely conservative investments or in cash," said Stacy Francis, president and CEO of Francis Financial in New York. "So if the market tanks, then you can go back and use that money to pay for living expenses rather than sell equities at a loss."

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Step two: Get cash you need from stocks that have outperformed. Big gains in the stock market likely mean your portfolio is out of balance. Retirees may find a greater percentage of the portfolio is invested in stocks than what they need in order to generate sufficient returns. "For those seeking cash flow, retirees can use this as an opportunity to liquidate the cash needed from the asset classes or stocks that have outperformed, thereby bringing the portfolio closer to its target weights," explained Rich Coppa, managing director of Wealth Health in Roseland, New Jersey.

Step three: Review and rebalance your asset allocation strategy. "As a result of low interest rates more investors have turned to stocks. It is incumbent on retirees to not only review the asset allocation but to rebalance their portfolio back to the strategic target percentages for each asset class to maintain their strategic allocation," Coppa said. "Retirees should have a sound asset allocation strategy for their portfolio across stocks, bonds, cash and alternative investments that meets their overall risk and return objectives."

Coppa and Francis, members of the CNBC Digital Financial Advisor Council, say there are a few key investments retirees should consider as they rebalance their portfolios. Both advisors agree that retirees with a stomach for risk should add some international stocks to their portfolio, especially if they have little or no exposure to these investments.

"As these markets embark on their own quantitative easing measures, it will inevitably help their stock markets," Coppa said. Francis advises clients to look to Europe and developed international markets, in particular. "Just be comfortable with ups and downs," she said.

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Retirees may also want to revise their allocations to bonds and fixed income. "The interest rate game is a tough game as it involves calling when rates will rise. When rates go up, bonds typically lose money," Francis said. "No one wants to see losses in their portfolio, particularly retirees. Look to bonds that are less sensitive to interest rates."

She encourages retirees to break up their bond portfolio into three parts—floating rate loans, bonds with higher yields and bonds with shorter maturities. For retirees who'd rather a skilled bond fund manager make changes and tweaks for them, Francis urges them to consider buying an "unconstrained bond fund," which has the flexibility to include assets from across the fixed income spectrum.