Once you retire, your investing priorities change. Making your money last as long as you do (or longer) matters more than striving for the highest imaginable returns. And because you'll be relying on your portfolio for income, it's also important that the money is available when you need it.
Because of those needs, you'll need an intelligent bond strategy as part of your retirement portfolio -- but bonds alone likely won't cut it. Even once you're retired, stocks can -- and likely will -- play an important role in your financial well-being. Here are three reasons why.
First and foremost, stocks can provide long-term growth to help ensure your portfolio lasts as long as your retirement does. If you retire young and healthy enough, it's possible your retirement will last 30 years or more. Because stocks represent ownership stakes in companies that have the potential to grow, the stocks themselves could be worth much more in the future than they are today.
Growth matters for retirees because, even as a retiree, you face a very real risk of watching your savings get eroded by inflation. If you assume inflation runs near its historic rate of 3%, then after 30 years, every $1,000 will only have the purchasing power of $412 of today's money. As a retiree depending on your portfolio to make ends meet, you need to protect your long-term purchasing power if you want to maintain a comfortable lifestyle throughout your retirement.
Though you may not think of stocks as income investments, they can bring you a steady stream of cash. Indeed, the recent yield on the S&P Depository Receipts (NYSEMKT:SPY), an exchange-traded fund that tracks the S&P 500 index, is about 2.2%. That's a higher yield than the recent 1.7% yield on 10-Year US Treasury Bonds. In other words, it's possible to get higher income from stocks than from many bonds at the moment, though the dividends paid by stocks are a bit riskier than the interest payments made by bonds.
Retirees need regular income to help make up for the loss of a paycheck. While your bills may shrink in retirement, they won't go away entirely. Whether you spend the cash directly or use it to help maintain a bond ladder that provides you with spending cash, income from your investments can play a key role in your retirement plan. Additionally, since dividends are usually more reliable than a company's stock price performance, dividend income can often keep you from having to sell your stocks during a rough patch in the market.
3. A stepped-up cost basis
At some point, your retirement will end. When you pass away, your heirs will inherit any assets you leave behind. Those heirs will typically receive what's known as a "stepped up basis" in the value of those assets. In other words, their cost basis will be the value of the shares on the day you passed away, rather than your original purchase price.
Imagine that 30 years ago you paid $1,000 for stock that ended up being worth $10,000 when you passed away. If you passed that stock to your heirs, and they later sold it for $20,000, then they would only pay capital-gains taxes on their personal gain of $10,000 -- not the $19,000 difference between your original purchase price and the final sale price.
A stepped-up basis matters for those you leave behind. Not only can it help your heirs lower their own taxes, but it can help them with the transition associated with the loss of their loved one. Say, for instance, that you routinely watch your grandchildren for free so that your own children don't have to pay for day care. If you were to pass away, your kids would likely face higher expenses from those day care bills. A stepped-up basis in what you leave behind can substantially ease that burden for them.
It always makes sense to own stocks
While stocks play a different role for retirees than they do for people still building their nest eggs, these three reasons showcase why it makes sense for retirees to continue to own stocks. Just be sure to balance those stocks with cash and bonds during your retirement so that you don't sacrifice tomorrow for the sake of striving for the absolute possible best outcome 20-plus years down the road.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.