Investing in the stock market can be a risky proposition because of the market’s potential to fluctuate taking the investors on a roller coaster ride. However, if you can pull off the risk, you can earn more than you had bargained for. If you are not much of a risk taker, investing in bonds or buying annuities would be a consideration.
During our investing lives, most of us try to achieve the highest returns possible with the level of risk we can tolerate. Most of our investing decisions are made in an attempt to accumulate a nest egg big enough to support us in retirement.
Once we reach retirement, we are apprehensive about investing in stocks. Our goal then is not to worry about growing savings but ensuring whether the accumulated fund is good to last for the next 30 years or so. So, the question arises: Should we invest in retirement stocks? If yes, then how much risk is too much?
Whether you should own stocks or not depends on these 3 criteria:
- Can you take the risk?
First, you will need to calculate the minimum return your investments need to earn for you to ensure that you sustain your lifestyle goals in retirement. If you are fine with no cash in your account when you die, and your saved amount is enough to meet your expenses for the next 30 years you should not take the risk. On the other hand, if you are left with extra funds after securing your lifestyle goals for the next 30 years, you can afford to take the risk by investing in stocks.
- Can you use risk as your holistic plan?
Another approach you can employ is investing in laddered CDs or bonds that matures each year for the amount you need to meet your lifestyle goals for the next 20 years. The remaining fund can be invested in stocks. During the 20-year period, if your stocks do well, you would have reasonable profit that could ensure additional years of cash flow.
- Do you have an action plan if the risk materializes?
If your stocks don’t do well, you need to understand the consequences and have an action plan ready. There are 2 things to keep in mind here:
- Do not own stocks if you do not have the flexibility to keep them when the market is down.
- If your stocks aren’t doing well for a prolonged time, you may have to think of cutting down on your expenses.
The good and the bad of having stocks as part of your retirement portfolio
All that is Good
- Stocks are good retirement investments that help your investment portfolio and retirement income withstand inflation.
- Stocks give you higher returns and thus higher income and the chance to live a better and secured retired life.
All that is Bad
- The stock market is volatile. If your stock delivers lower returns, you may have to spend less than what you had in mind.
- It causes emotional stress because of constant anxiety about fluctuating stock prices. If you are not careful enough, you may end up selling at the wrong time and thus lose out on the money which could be used to live well during your retirement.
To learn how you can make wise investment decisions about stocks, contact the team at Self Directed Retirement Plans today!