3 ways retirees can make the most of their money in an unpredictable market
By Harriet Edleson
When stock market volatility and inflation persist, smart retirees are looking for ways to get the most out of their money. It’s not easy, but small steps can make a difference and prevent you from making bad choices in unpredictable times.
“Even when the seas are rough, there are always little things you can do,” says Certified Financial Planner Andrew Feldman, founder of Chicago-area AJ Feldman Financial.
Indeed, the easiest way to cope is to spend less and earn more – if you can. Yet not everyone agrees on exactly what is best to do or what will be comfortable in turbulent times. Some think it’s wise to find income wherever you can while others advise cutting back on your expenses. A balance of the two might work well. It all depends on your assets, your income and the cost of maintaining your lifestyle.
“Rather than trying to get more returns in a time like this, it’s better to cut your expenses,” says Daniel Lee, director of financial planning and advice at BrightPlan, a wellness benefits provider. be financial based in San Jose, California.
Others advise to increase your income. “If you’re concerned about your stable income, do some counseling work,” says Roger Young, vice president, senior director of retirement insights, T. Rowe Price. “Find a side job. Make a hobby a side job. There are many reasons to work in retirement.”
Yet not everyone is able or inclined to return to work in retirement. Whichever camp you’re on, finding ways to increase your income can make a difference. At least it can create a sense of control during what may seem like a chaotic time.
As behavioral economists and financial planners know, emotions can play a role in financial decisions.
“People feel compelled to take action,” says Certified Financial Planner Brent Neiser, founder of What’s Next with Money. Still, he says, “staying put can be a gesture in itself.”
When the stock market fluctuates and inflation hits a 40-year high, retirees may react too quickly rather than carefully assess their current situation before taking action. Keep a long-term perspective, says T. Rowe Price
Young. “If you have a good plan, you probably don’t need to overreact,” he says.
First, make sure your emergency fund/cash reserve is in place. If you have cash to cover at least a year of your expenses, you can start taking a few small steps to improve your finances while inflation and market volatility persist:
Consider buying stocks that pay dividends
You may already have some dividend-paying stocks in your (hopefully) balanced portfolio. Additionally, you may have shares in companies that during the pandemic have stopped paying a dividend. While some companies have started paying a dividend again, others have not.
Read:These dividend-paying stocks yield at least 5% and have plenty of room to increase payouts
“It’s nice to have a mix of dividend-paying stocks,” says Lee. If a stock’s price is relatively low right now and it pays a dividend, it’s worth considering. If you have extra money you’d like to invest, “you can look to dividend-paying stocks for some of your money,” says Young. If the dividend is between 2% and 4% and the stock price is falling, buying low “is definitely a reasonable strategy,” he says. Still, if a dividend is “extremely high,” Young says, be careful and ask yourself why.
If you’re looking for income, you might want your dividends paid to you rather than reinvested, says Neiser, who also served as chairman of the consumer advisory board for the Consumer Financial Protection Bureau. “It’s a way to earn quarterly income,” he says. For example, suppose you retired from your long-term job, but postponed taking Social Security until age 70. Dividends can be a way to bridge your income between the time you retire and the day you start receiving Social Security payments.
Also, consider the tax implications of dividend-paying stocks. According to the IRS, the most common type of distribution from a corporation is dividends, which are paid out of the company’s earnings and profits. Dividends are classified as ordinary or qualified. Ordinary dividends are taxable as ordinary income; qualified dividends, which meet certain requirements, are taxed at lower capital gain rates. These rates are 0%, 15% or 20% and depend on the income bracket of the investor. Qualified dividends for ordinary shares are generally those that have been held for at least 61 days. In most cases, if you have held a stock for more than two months, you will pay the lower qualified dividend tax rate.
Invest part of your cash reserve in bonds I
You can purchase up to $10,000 of I Bonds electronically each year, plus up to $5,000 of paper I Bonds from a tax refund. “You can add them to your portfolio,” says Lee.
The inflation rate resets every six months and the initial rate is 9.62% for new Series I Savings Bonds purchased through October 2022. The current rate will apply for the next six month period. procurement. For example, if you purchased an I bond on July 1, 2022, the 9.62% would be applied until December 31, 2022, according to TreasuryDirect.gov.
Interest is compounded semi-annually. The IRS requires you to report interest income for the year in which you repaid the bond.
Learn more about bonds I
Open a High Yield Savings Account
Keep your emergency fund in a high-yield savings account. If you have a considerable time horizon, it may be worth it, says Feldman. “If you’re 65, you still have a time horizon,” he says.
Lee recommends keeping your cash “easily accessible and convenient,” rather than hopping from bank to bank. “If you have $100,000 in cash, put it in a high-yield savings account,” he says. Some customers “love the security,” he says. “It helps them sleep at night.” Find interest rates here.
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