In all likelihood, the prices of goods and services will continue rising year by year.
This may not be too much of a problem for you if you're working, because your salary is probably also going up over time. But, if you are retired, you may find that inflation becomes a bigger concern -- which is why you need some investments with the potential for providing rising income during your retirement years.
Of course, as a retiree, you may feel that you need to invest more conservatively than you did when you were working.
After all, you may think, you're no longer drawing a paycheck, so you can't really afford to take chances on investments that constantly fluctuate in value.
Consequently, you may be inclined to stick with fixed-income vehicles, such as investment-grade bonds and certificates of deposit (CDs).
However, bonds, CDs and other fixed-income investments carry their own type of risk-- purchasing power risk. Suppose, for example, that your bonds and CDs provide you with interest income of $1,000 a year.
Even with a relatively mild inflation rate of 3 percent, your $1,000 will only be worth $863 in five years, and $744 in 10 years. If inflation picks up to 5 percent, the purchasing power of your $1,000 will drop to $774 in five years and to just $614 in ten years.
Those are big drops, and if you spend two or even three decades in retirement -- a definite possibility --ou could lose even more purchasing power if you invest solely in fixed-income vehicles. That's why you may want to consider dividend-paying stocks, which can provide you with the potential for rising income.
You can now find dividend-paying stocks in a variety of industries, including financial services, food producers, consumer products, pharmaceuticals, technology, publishing and others. But in searching for stocks that pay good dividends, it's important not to be "shortsighted" and just go after those companies that seem to be paying the highest dividends at the moment.
You need to be sure that a company's earnings are sufficiently strong to support its dividend payouts. If a firm's earnings are weak, it may well cut its dividends, thereby jeopardizing your income stream.
By doing some research, you can find many stocks that have actually increased their dividends for 25 or more consecutive years. Although this past performance won't necessarily indicate future results, it's still a pretty good track record, and it's an indicator of strong, well-run companies who seek to reward their investors.
Still, as a retiree, you do need to keep two points in mind about dividend-paying stocks. First, they can increase, decrease or totally eliminate dividend payments at any time, without notice. Second, they are stocks, which means their price can and will fluctuate, so you could lose some, or all, of your initial investment amount.
Nonetheless, dividend-paying stocks can be a valuable part of your portfolio during your retirement years -- but you should also include bonds, CDs, government securities and other investments. By making the right moves, you may be able to stay ahead of inflation without taking on an excessive degree of risk. That's a winning combination.
Scott Flake is a licensed financial adviser with the firm of Edward Jones. For more information, call him at 468-1470.