During your working years, you put money away, hoping that it will grow enough to help provide you with a comfortable retirement. But once you retire, haven’t you reached your goal? You don’t still need to invest for growth, do you?
Actually, you do. You may be retiring, but the cost of living marches on. In fact, even with a relatively mild inflation rate of three percent, you’ll pay about twice as much for goods and services in 25 years as you do today. And since you could easily spend two or three decades in retirement, you need to be prepared for these costs.
At first glance, you might think that this situation presents you with a daunting challenge. Historically, stocks are the only financial assets that have significantly outperformed inflation. Yet, as a retiree, you may be nervous about investing in equities, especially given the stock market’s performance last year. How can you stay ahead of inflation without taking on too much risk?
Unquestionably, you’ll have to manage your investment portfolio very carefully during your retirement years. But it’s important to realize that you do have options. Here are a few suggestions:
• Consider dividend-paying stocks. By doing some research, you can find stocks that have paid dividends for many consecutive years. Obviously, a source of rising income can help you in your battle against inflation, and many dividend-paying stocks also offer the potential for long-term growth. Keep in mind, though, that a company can decrease or eliminate its stock dividend at any time.
• Create an inflation-fighting withdrawal strategy. During your retirement, you will probably need to take withdrawals from all your resources including your taxable brokerage and savings accounts; your tax-deferred accounts, such as your Traditional IRA and your 401(k); and your tax-free accounts, such as your Roth IRA.
Obviously, the longer you can preserve your tax-advantaged growth potential, the better off you’ll be when it comes to staying ahead of inflation. Consequently, you may want to take withdrawals from your taxable account first, tap into your Traditional IRA and your 401(k) next and save the Roth IRA for last. That said, this is just a rule of thumb, as your actual strategy may change from year to year, depending on your expected tax burden.
•Think about TIPS. Most types of Treasury bills or bonds pay a fixed rate of return, which makes them susceptible to inflation. However, you can also invest in Treasury Inflation-Protected Securities, or TIPS.
The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When your TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. Be aware, though, that you’ll be taxed on the annual inflation adjustments, even though you won’t receive this money until your bond is redeemed. Consult with your tax advisor to determine if you should put your TIPS in a tax-deferred account, such as a Traditional IRA.
You’ll have to cope with inflation throughout your retirement years. But by making the right moves, at the right time, you can greatly boost your chances of enjoying the lifestyle you’ve envisioned.
Scott Flake is a financial advisor with Edward Jones. He hosts a weekly informal investment discussion on Tuesdays at 10 a.m. at Gerardo’s Italian Bistro. For more information, call (928) 468-1470.