A problem that affects numerous retired people is to create retirement income in the face of the growing cost of living. Despite moderate inflation, costs of living have a tendency to rise with time. This could reduce the purchasing power retirees can obtain from fixed income investment strategies, even while they need to meet higher expenditures. Where are you able to find a source of retirement income that may mitigate with inflation, along with staying ahead of your expenditures?
Our personal recommendation: consider placing some of your money in to a portfolio of large capitalization dividend-paying stocks as an income generation option. This could assist to provide you with earnings that keeps pace with the increasing costs of living. For the thirty years ending 12/31/04 (will be updated in a future post) , the flow of dividends from an investment in a basket of shares symbolizing the S&P 500 index created an expanding stream of retirement income. In that exact same period, rate of interest from bank certificates of deposit fell from 7.42% to 1.85% (the S&P 500 is an un-managed group of investments considered to be representative of the stock exchange in most cases; it is not possible to invest directly in an index).
As you can see fom the above chart (maroon colored bars), a retiree depending on bank deposits for income would have seen their income crushed while the dividend growth investor (purple bars) would have seen a steady increase in income.
Although public stock may help you to control inflationary risks, the returns that these shares pay out are extremely dependant upon the general profitability of the issuing enterprise. Therefore, you will want to really think about the dividend payment history of the enterprise prior to making your investment selections. For safety of your retirement income, you need shares ranked highly for security by research services such as Morningstar or Valueline.
Despite the fact that the typical retiree would prefer FDIC Bank Certificates of deposit as a more secure alternative, the integrated chart demonstrates in fact, dividend paying stocks have been a far more safe and guaranteed supplier of retirement income.
A couple of additional things need to be considered about stocks and CDs. First publicly-traded shares have a tendency to be fitted for investors which are looking for asset appreciation and are prepared to take on the extra investment risk. On the other hand, CD's are suited for those concerned about preserving their own principal investment and are deterred by market risk. With this in mind, it must be remembered that CDs are FDIC covered while publicly-traded shares are not. The value of publicly-traded shares fluctuate and could lead to gain or loss upon sale.
The income from these purchases is also subject to differing income tax guidelines. Stock dividends are generally subject to federal income tax of 15%, while CD interest is subject to taxes as standard federal income tax rates, which can range anywhere from 10%-35%. CDs may have an early withdrawal penalty if money is taken prior to maturity. However, the stock of most largely capitalized organizations could possibly be bought and sold at any time when the market is open, with small trading commissions to buy or sell.