The nest egg you bring with you into retirement shouldn't just sit in cash. Rather, it's important to keep your IRA or 401(k) plan invested so it continues to generate growth during your senior years. Doing so could make it so you're able to take larger withdrawals and enjoy more financial freedom later in life. And one investment it really pays to load up on is dividend stocks. Here's why.
1. Income stability
Many retirees end up experiencing a drop in income once their careers wrap up. This especially applies to those who have to rely heavily on Social Security and can only take limited withdrawals from their savings.
The average senior on Social Security today collects around $20,000 a year. For many people, that just isn't enough income to live on, especially when we factor in rising healthcare costs, which are generally unavoidable for retirees.
The great thing about owning dividend stocks is that they can serve as a backup or supplemental income source -- in general and also during retirement. Companies with a long history of sharing their profits with stockholders tend to pay dividends even during periods of market turbulence. And so if you hold onto dividend stocks, you can use your dividends as income when needed.
2. Growth opportunity
Dividend stocks have the potential to gain value over time the same way all stocks do. But they might lend to growth in your IRA or 401(k) plan for one big reason -- you can reinvest your dividend payments if you don't need to cash them out. Granted, you can do the same with interest you collect from bonds in your portfolio, but depending on the stocks you own, some of their dividend yields may be more generous than what your bonds pay you.
3. Protection against inflation
Many seniors today are feeling the impact of inflation. Even though Social Security recipients got a generous 5.9% cost-of-living adjustment to start off 2022, the recent rate of inflation had outpaced that boost, leaving seniors in a financial lurch and making it very difficult for them to keep up with everyday expenses.
But the reality is that inflation poses a constant threat to retirees, even during periods when it's less rampant than it is today. And so holding dividend stocks in your portfolio is a smart bet.
This especially holds true if you own Dividend Aristocrats, which are companies that have increased their dividend every year for at least 25 years in a row. If your dividend payments grow year over year, they can help offset rising living costs -- something that Social Security has long failed to do.
A solid move for your retirement
Retirees are often advised to shift away from stocks and load up on bonds, since they're typically a lot less volatile. But that doesn't mean you shouldn't hold any stocks in retirement. And if you're going to keep a chunk of your assets in stocks, dividend stocks offer a lot of benefits that make them worth considering.