Investors of all ages use stocks to try to boost their returns. Yet last year, many retirees wondered why they were holding any stocks at all.
Surviving the bear
It's true that 2008 was a disastrous year for stock investors across the board. Younger investors, however, were in a much better position to work through the decline, and by steadily investing throughout the downturn, many young investors have actually seen their retirement portfolios rise in value since the beginning of the bear market.
Older investors, however, weren't so lucky. Although many retirees benefited from the strong performance of bonds in their portfolios, falling stocks ate away vital capital that retirees will never be able to earn back. Moreover, some retirees who had invested in target-date mutual funds were surprised to discover that even the most conservative of the available choices still had substantial exposure to the stock market, creating unexpected losses.
Despite those risks, there are lots of good reasons why it may make sense for retirees to have at least a portion of their money in the stock market. Here are just a few.
1. Retirees need growth.
If you're retired, you need to be somewhat more conservative with your money for one very good reason: You don't expect to earn anymore money in the future. Although younger investors can take chances, secure in the knowledge that even if they don't pan out, they'll be able to rebuild their wealth by saving from their future paychecks, retirees need the money they've already saved to last a lifetime.
In fact, people's lengthening lifespans have made it increasingly necessary for retirees to own assets that will not only preserve principal but also grow in value. After 10 years, a 4% inflation rate eats away nearly a third of your portfolio's purchasing power. And with medical costs rising much more quickly than the general inflation rate, even what seems like a more than adequate nest egg may not get the job done 10 or 20 years down the line.
That's where stocks can answer the call. Historically, stocks have risen at a faster pace than inflation. Companies like Apple
2. Retirees need income.
Another thing that you need after you retire is regular income. Social Security and a company pension may help cover some of your living expenses, but in all likelihood, you'll need a pretty big account balance of your own to supplement that income.
With bonds and other income-producing investments paying relatively low rates, dividend-paying stocks are one of the best ways for retirees to combine a nice income payout with the growth prospects they need. For instance, the following companies currently have yields that match or exceed the 30-year bond rate of 4.4%, yet they've also provided decent growth over the past 10 years:
|
Stock |
Current Dividend Yield |
10-Year Avg. Annual Return |
|---|---|---|
|
Dominion Resources |
4.9% |
8.8% |
|
Exelon |
4.5% |
13.2% |
|
Telefonica |
5.3% |
13.5% |
|
Terra Nitrogen |
6.4% |
49.9% |
|
Piedmont Natural Gas |
4.7% |
8.5% |
Source: Yahoo! Finance.
3. Retirees want to leave a legacy.
Lastly, many retired investors don't really want to spend everything they've saved. They'd like to pass something on, giving their children and grandchildren a leg up in a tough financial climate.
Owning some stocks with the intent of passing them on is a smart use of surplus wealth for well-off retirees. After your death, your heirs won't owe any capital gains tax on stocks they inherit, potentially saving thousands in income tax. Perhaps more importantly, passing on stock can encourage your descendants to pay more attention to investing in their lives as well.
If you're retired, you might feel twice-shy after getting once-burned by the bear market. Like it or not, though, you need stocks -- and they're the best way for you to achieve all the financial goals you have.
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