By Harriet Edleson
When stock market volatility and inflation persist, smart retirees seek ways to make the most of their money. It's not easy, but small steps can make a difference and keep you from making the wrong moves in unpredictable times.
"Even when the seas are rough, there are always little, tiny things you can do," says certified financial planner Andrew Feldman, founder of AJ Feldman Financial, based in the Chicago area.
Indeed, the simplest way to cope is to spend less and earn more -- if you can. Yet, everyone doesn't agree on exactly what is best to do or what will be comfortable in turbulent times. Some believe it's wise to find income wherever you can while others advise cutting your spending. A balance of the two might work well. It all depends on your assets, income and the cost of maintaining your lifestyle.
"Rather than trying to squeeze more returns in a period like this, it's better to reduce your expenses," says Daniel Lee, director of financial planning and advice at BrightPlan, a financial wellness benefit provider based in San Jose, Calif.
Others advise increasing your income. "It you're concerned about your steady income, do some consulting work," says Roger Young, vice president, senior retirement insights manager, T. Rowe Price. "Find a side gig. Make a hobby into a side position. There are multiple reasons to do some work in retirement."
Yet, everyone isn't able or inclined to return to work in retirement. Whichever camp you are in, finding ways to increase your income can make a difference. If nothing else, it can create a sense of control during a time that might seem chaotic.
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. Yet, he says, "standing in place may be a move in itself."
When the stock market fluctuates and inflation hits a 40-year high, retirees might react too quickly rather than evaluate their current situation carefully before acting. Keep a long-term perspective, says T. Rowe Price's
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 that covers at least a year of your expenses, you can begin to take some small steps to improve your finances while Inflation and market volatility persist:
Consider buying dividend-paying stocks
You may already have some stocks that pay dividends in your (hopefully) balanced portfolio. In addition, you may have some stocks in companies that, during the pandemic, stopped paying a dividend. While some companies have resumed paying a dividend, others have not.
Read:These dividend stocks yield at least 5% and have plenty of room to raise payouts
"It's good to have a mix of dividend-paying stocks," says Lee. If a stock price is relatively low now, and paying a dividend, it's worth considering. If you have some extra cash that you'd like to invest, "you can turn to dividend-paying stocks for some portion of your money," says Young. If the dividend is in the 2% to 4% range, and the stock price is down, buying low "is certainly a reasonable strategy," he says. Yet, if a dividend is "extremely high," Young says, be cautious, and consider why that might be.
If you're looking for income, you might want your dividends paid to you rather than reinvested, says Neiser, who also was chair of the consumer advisory board at the Consumer Financial Protection Bureau. "It's a way to receive some quarterly income," he says. For example, say you've retired from your long-term work but have postponed taking Social Security until you are age 70. Dividends can be a way to bridge your income between the time you retire and the day you begin receiving Social Security payments.
In addition, 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 corporate earnings and profits. Dividends are classified as either ordinary or qualified. Ordinary dividends are taxable as ordinary income; qualified dividends, which meet certain requirements, are taxed at lower capital-gain rates. Those rates are 0%, 15% or 20%, and depend on the investor's income bracket. Qualified dividends for common stock are typically those that have been held for at least 61 days. In most cases, if you've held a stock for more than two months, you'll pay the lower qualified dividend tax rate.
Invest some of your cash reserve in I bonds
You can buy up to $10,000 worth of I bonds electronically every year, plus up to $5,000 in 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 the new Series I savings bonds purchased through October 2022. The current rate will be applied for the period of six months after the purchase. For example, if you bought an I bond on July 1, 2022, the 9.62% would be applied through Dec. 31, 2022, according to TreasuryDirect.gov.
Interest is compounded semiannually. The IRS requires you to report the interest income for the year in which you redeemed the bond.
Readmore about I bonds
Open a high-yield savings account
Keep your emergency fund in a high-yield savings account. If you have a considerable time horizon, it can be worth it, says Feldman. "If you are 65 you still have a time horizon," he says.
Lee recommends keeping your cash "easily accessible and convenient," rather than jumping from bank to bank. "If you have $100,000 in cash, put it in a high-yield savings account," he says. Some clients "love the safety of it," he says. "It helps them sleep at night." Find interest rates here.
(END) Dow Jones Newswires
09-17-22 1636ETCopyright (c) 2022 Dow Jones & Company, Inc.