Many retirees think that they should pull away from the stock market, mistakenly believing that the risks involved with stocks makes them unsuitable investments for a retiree's portfolio. Yet the fact is that with retirees living longer than ever, having stocks in your investment portfolio is almost a necessity if you want your retirement nest egg to provide enough growth to meet your financial needs for the rest of your life. Here, we'll give you five facts about stocks that every retiree needs to know.
1. Many stocks provide more investment income than bonds do.
For a long time, there was a trade-off in choosing between stocks and bonds. Bonds provided more reliable income, typically having higher yields. Stocks usually paid less income, but they also gave you more potential for share-price growth to provide superior total returns.
Lately, however, that usual rule has gotten turned on its head. The bond market has seen bond yields fall so far that the current yield on the 10-year Treasury bond is only a bit higher than the average dividend yield for the S&P 500 index. Plenty of stocks have dividend yields that exceed what you could get from high-quality government or corporate bonds. Not all high-yield dividend stocks are good choices, but there are blue-chip dividend stocks with attractive yields that are worth a closer look.
2. Discount brokers make investing in stocks easy and inexpensive.
Many retirees remember a time when investing in stocks was expensive. High commissions ruled the industry, and you typically had to buy individual stocks in 100-share lots. That effectively required you to have thousands of dollars just to buy a single stock, and tens of thousands to put together any sort of diversified portfolio.
Discount brokers have changed the game for stock investors. Now, commissions of $10 or less are commonplace. Moreover, odd lot transactions have become much more common, making it not only possible but also practical to buy or sell as little as a single share in some instances. Investors with large amounts of money to put to work do still get what amounts to volume discounts, but the costs no longer keep people out of the market entirely.
3. You can buy international stocks on U.S. exchanges.
Some investors are under the impression that you can't buy shares of foreign companies on the NYSE or the Nasdaq Stock Exchange. However, many multinational giants that are headquartered in other countries nevertheless do choose to list their shares on U.S. exchanges, taking advantage of interest and liquidity to make them available to investors here.
In some cases, foreign stocks will be listed on more illiquid markets in the U.S., making them somewhat less desirable to trade than their U.S. counterparts. With many brokers offering the ability to trade directly on foreign exchanges, you often have a choice in how you want to structure your international investments.
4. Dividends on stocks can be tax-free for some taxpayers.
Qualified dividends from most stocks get preferential tax treatment from the IRS, and in some cases, that can give you what amounts to tax-free income. The tax laws governing dividends set a maximum rate of 15% for those who are in the 25% to 35% tax brackets, and a higher 20% maximum applies to those in the top 39.6% bracket.
Even better for retirees, those who are in the 10% to 15% tax brackets don't have to pay any tax at all on qualified dividends. That tax advantage gives dividend stocks an even bigger advantage over bonds and other interest-bearing investments, on which retirees have to pay higher ordinary tax rates. Given how many retirees are in those lower brackets, it pays to get tax-free treatment where you can.
5. Stocks also benefit from lower rates on long-term capital gains.
Similarly, capital gains on sales of stock held more than a year qualify for long-term capital gains treatment, which bear the same tax rates as qualified dividends. Favorable long-term capital gain treatment applies to all investments, not just stocks. But because of the higher appreciation potential from stocks, the tax break applies more frequently to stock-related capital gains. Again, being able to get investment gains that are effectively tax free is a big deal for cash-strapped retirees.
Don't make the mistake of ignoring stocks in your investment portfolio after you retire. By being aware of these facts, you can find the right market exposure and pick stocks that will suit your needs throughout your retired years.