Investing in Retirement

It’s easy to imagine that after saving and investing throughout your working life, you’ll stop doing so once you retire, perhaps selling off your stocks and parking your assets in safer places such as certificates of deposit (CDs). However, there’s a strong case to be made for continuing to invest in stocks.

After all, if you retire at, say, 65, and then live to 95, you’re looking at 30 years of retirement, a long period in which your money would likely have grown a lot if invested in stocks. The trick, then, is to keep out of stocks any money you expect to need within five years (or 10 years, to be ultraconservative) — because in the short term, as we’ve recently been reminded, anything can happen. The rest of your money can stay invested in stocks in order to grow.

You can consider bonds for some of your money, as many retirees do, but know that stocks will almost always do better over the long run. Business professor Jeremy Siegel’s research has found that between 1871 and 2012, stocks outperformed bonds 78% of the time over all 10-year periods, 96% of the time over all 20-year periods, and 99% of the time over all 30-year periods.

Another smart move for retirement is to invest in healthy and growing dividend-paying stocks, as they will generate income without your having to sell off shares from your holdings. If you have, say, $200,000 invested in dividend payers that have an overall average dividend yield of 4%, you can look forward to $8,000 in annual income — or even more, as dividends tend to be increased over time, too.

By continuing to grow much of your portfolio throughout your retirement, you can protect your assets from inflation, which shrinks the buying power of money over time. Inflation has averaged about 3% annually over long periods, enough to roughly halve your money’s buying power over 25 years.

If retirement planning has you confused or worried, consult a financial adviser. You can find one near you at NAPFA.org.