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Stocks can be risky for retirees. But in some cases, buying more stocks makes sense. Read on to learn more.
There’s a reason retirees are often advised to scale back their stock holdings, whether in a brokerage account or IRA, and load up on more conservative investments, like bonds. Stocks have a tendency to be very volatile, so their value can swing wildly from one week (or even one day) to the next.
Bonds, on the other hand, tend to be more stable. This isn’t to say that the value of bonds can’t drop over time. But you’re less likely to see the value of your bonds move significantly from one day or week to the next. And so bonds are commonly considered a suitable investment for retirees.
But all told, it’s still a good idea to hold some stocks in your brokerage account or IRA in retirement. And if you happen to be sitting on extra money, you really shouldn’t hesitate to put it into the stock market.
You might as well put your extra money to work
Many retirees end up in a situation where money is tight. But what if you’re in a different boat?
Maybe you saved so well throughout your career that you managed to amass a giant nest egg worth millions. If that’s the case, and you’re comfortable financially, then you may end up having extra money at your disposal in retirement. And if so, you should feel good about putting it into stocks.
See, stocks are dangerous when the money you’re investing is money you might need in the near term (say, within five to 10 years). If you’re forced to liquidate a stock position when the value of those stocks is down, you’ll lock in a loss.
But if you’re talking about having extra money you don’t expect to use to cover bills, then you might as well invest it and see if you can grow it into a much larger sum. That way, you’ll have additional funds to spend on travel, hobbies, gifts for your grandchildren, or pretty much anything you want.
The upside could be big
Over the past 50 years, the stock market has delivered an average annual return of 10%, based on the S&P 500 index’s performance. So, let’s say you have an extra $20,000 in cash and you feel there’s no way you’re going to need that money within the next 10 years. If you invest it in stocks and snag a 10% return, you’ll grow your $20,000 into about $52,000 in a decade’s time.
Of course, if you’re sitting on money you technically don’t need, you might say to yourself, “Why take the risk of investing in stocks?” And that’s fair. On the other hand, if you’re talking about money you really don’t need, you’re actually not taking such a big risk — because if you were to lose all that money, it probably wouldn’t stop you from paying your bills and doing the things you want to do.
This isn’t to say that anyone wants to lose a chunk of money. But the typical investor who holds stocks for a longer period of time doesn’t tend to lose money. If that were the case, fewer people would have stock portfolios. So that’s something to consider as well.
Many retirees don’t have extra money — they barely have enough money to scrape by. But if you’re in the opposite situation with your personal finances, investing your excess cash in stocks could be a really smart move.
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