When you’re near retirement, it may concern you that a drop in the stock market could decimate your retirement savings. Then, it might be tempting to get out of the stock market entirely and move your money into bonds and other fixed income and cash investments. That way, you’ll have a steady source of retirement income you can count on without worrying about stock market ups and downs.
But perhaps an even greater threat than market volatility awaits the unwary investor. That threat is inflation. Over time, even a relatively low annual inflation rate of 3% will reduce the buying power of income you receive from interest-bearing investments, such as bonds and certificates of deposit. By relying solely on interest income to provide sufficient cash flow during retirement, you could wind up with a lot less money than you expected.
Let Stocks Enter the Race
To deal with inflation, it is recommended that a person invest in the stock market. When a person invests a portion of their portfolio in these financial instruments, they will obtain a return that will withstand/stay ahead of inflation. A decision like this could benefit your retirement and make it last 20 to 30 years, or more. Historically, stocks have offered the best chance of outpacing inflation in the long term.1 Think about maintaining a mix of stock, bond, and cash equivalent investments in your retirement portfolio to give you an edge in the race against rising costs.
Don’t Get Sidelined by Taxes
Right now, long-term capital gains and qualified dividends from stock investments are generally taxed at a maximum rate of 20%. Meanwhile, interest income from taxable bonds and cash equivalent investments is taxed at regular income tax rates of up to 37%.
But there’s no telling what may happen to tax rates in the future. Make sure you consider the tax implications of your investments in your planning.
Every situation is unique, so be sure to consult a professional before taking action. Contact Popular’s Retirement Center at firstname.lastname@example.org. If you have a 401k plan with Popular, remember that you can count on our group of experts at TeleBanco Popular® to guide you on matters related to your retirement plan. Call us at 787-724-3657 (press option 2 three times).
1Past performance is no guarantee of future results.
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The information and general descriptions found in this article are designed to help you understand some of the factors you should generally consider when evaluating the appropriateness of any strategy or investment within your retirement plan. Any description included is for informational and educational purposes and for your independent consideration only; it is not to be regarded or viewed as advice or as a suggestion to take (or refrain from taking) any particular action. By providing this information, we assume that you can evaluate this information and the general descriptions found here to exercise your independent judgment. Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice services. If legal, accounting, or tax advice services are required, you should seek the services of a competent professional. Insurance and investment products are not insured by the FDIC, they are not deposits or obligations of, nor are they guaranteed by Banco Popular, its subsidiaries and/or affiliates. Investment products may lose value. Some insurance products may lose their value.