• Investors who hit their retirement savings goal ahead of schedule may be wise to reduce their exposure to stocks in favor of safer assets.
• Otherwise, a market crash might mean a huge loss and the need to sacrifice important goals like putting a kid through college or traveling the world, according to financial planners.
• However, many investors should keep a stock allocation of at least 30% to hedge against inflation risk.

Have you hit your retirement savings goal ahead of schedule? If so, it may be time to protect that nest egg by unloading some stocks.

The idea is to reduce investment risk and preserve savings.

Stocks are an important building block in a retirement portfolio: They yield higher returns, on average, than "safer" types of investments. But those returns come with more risk — namely, the possibility of a big loss. Young investors have ample time to claw back losses, but near-retirees don't.

For older investors, stocks are "Three Mile Island and Chernobyl-level risky, and you do want to cut back on them," William Bernstein, an investment advisor and author of "Rational Expectations: Asset Allocation for Investing Adults, has said.

It should be stated up front: Most retirees need at least some stock exposure to guard against other risks like inflation (rising consumer costs) and longevity (living longer than expected).

But if you have enough money to live comfortably in old age, why not take some chips off the table? This involves shifting some money from stocks to bonds and cash, which are generally less volatile.

Otherwise, a market crash might mean a huge loss and the need to sacrifice important retirement goals like putting a kid through college or traveling the world, according to Allan Roth, a certified financial planner at Wealth Logic, based in Colorado Springs, Colorado.

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Those risks outweigh the benefits of having a bit more money — which, if you've hit your savings goal, you theoretically don't need.

"Dying the richest person in the graveyard is not a good goal, in my opinion," Roth said.

"Taking too much risk increases the probability you'll run out of money," he said of retirement. "And the consequences of running out of money can be dire."

(The reverse logic isn't true: It's generally a bad idea to try investing your way out of a savings shortfall by taking outsized investment risk.)

This framework begs two questions: How do I know if I've hit my retirement goal? And, how do I "de-risk" my investment portfolio?

Retirement goal

Figuring out how much you might need for retirement can be tough.

There are several future unknowns: investment returns, life span, inflation, and costs for health care or long-term care, for example.

"There's always going to be uncertainty about how much money you're going to have," said David Blanchett, head of retirement research at PGIM, the investment management arm of Prudential Financial.

Retirees can use the logic of the "4% rule" as a rough guide for determining when they've hit their savings goal, according to financial planners.

Basically, retirees determine how much they'd need to withdraw from their investments in their first year of retirement to live comfortably.

Someone who needs $40,000 or less per year from their nest egg (after accounting for guaranteed income like Social Security and pensions) would have a high degree of certainty that a $1 million portfolio would suffice for a 30-year retirement, for example. ($40,000 is 4% of $1 million.)

(A recent Morningstar analysis cautioned that retirees should use 3.3% instead of 4% as a rule of thumb to reflect likely future conditions. This would yield a $33,000 first-year withdrawal in the above example.)

Reducing risk

Reducing your stock exposure might be a behavioral challenge.

For one, stock returns have been strong, and "recency bias" may lead investors to think that upward trajectory will continue. Savers have also been in an "accumulation" mindset for decades leading up to retirement.

Near-retirees also often update their goals once they've hit their initial savings target, Blanchett said. They may wish to maximize their legacy for children and grandchildren, which might mean keeping a higher relative allocation to stocks, for example.

And perhaps counterintuitively, those who are "overfunded" (meaning they've saved more than they need) have an ability to take more risk with their extra savings if they'd like, Blanchett added. That's because it doesn't matter if they lose that money.

But those who want to throttle back and get more conservative will generally be shifting money from stocks to fixed income and cash, according to financial planners.

Cash generally equates to a high-yield savings account, and perhaps a money-market mutual fund if interest rates rise a bit, according to Jude Boudreaux, CFP, shareholder and senior financial planner at The Planning Center.

Relative to fixed income, retirees will generally want short-term bonds (with a maturity of five years or less) with a high credit quality, said Boudreaux, who's based in New Orleans. (For simplicity, investors can buy bond mutual funds with these specifications.)

However, holding too much cash can be just as risky for near-retirees as having too high an allocation to stocks. Lower average relative returns from cash holdings mean a higher risk of inflation eroding your future purchasing power. 

Retirees who hold between 30% and 60% of their nest egg in stocks have a higher probability of making their money last over a three- to four-decade retirement, when compared to other allocations, according to Morningstar.

Boudreaux agrees there doesn't appear to be a financial benefit of reducing stocks below 30%.

"There's no real risk-free portfolio when you think of a long-term retirement," Boudreaux said. "It's more, what's the risk we're choosing?"