When investing for retirement when one is younger, it makes sense not only to take more risk in the stock market, but to invest more in growth stocks rather than value stocks that pay a higher dividend. Over time, riskier growth stocks generally have higher returns due to the fact that they are indeed riskier. It makes sense to take more risk when younger because you have a lot of time to make up for any losses. The longer the time horizon, the more risk one can take.

But as we get older, we should be taking less risk because most of us will need the money for retirement expenses. Many of us will also need income, which means dividend paying stocks have a more prominent role in our portfolios.

Let’s go through some reasons why most of us should be looking at sold dividend paying stocks in retirement.

Income To Cover Expenses

If a person in retirement has enough income to cover expenses, then the ups and downs of the market don’t impact him or her nearly as much as somebody who is dipping into their principal. Although dividends are not 100% guaranteed, they are certainly less volatile than stock prices. So it makes sense to lower the volatility of one’s retirement portfolio by making sure a significant portion of that portfolio is in solid dividend paying stocks.

This is also about being able to sleep at night. How many people lose sleep because of volatility in the stock market? But if you have dividend checks that continue to roll in, you know you are secure if your retirement income covers your retirement expenses. This makes for less stress overall and the ability to power through tough times in the financial markets.

Income Growth To At Least Keep Up With Inflation

If inflation is running at 2.5%, prices will have gone up by 50% in just 16 years. If your retirement income has not grown at all during this time, this means your expenses relative to your income have also gone up by 50%. This would be a huge hit to most people’s retirement plans.

That is why it makes sense to look at solid dividend payers who continue to raise their dividends over time, even during recessions. A few of these companies that stick out are Johnson & Johnson (JNJ), Procter & Gamble (PG), and Target (TGT). These companies have been raising dividends for at least 25 years, even during recessions. This is important because it provides stability when the rest of the stock market is tanking.

Taxes

Dividends can be taxed less than interest on bonds if you are in a higher tax bracket. The interest on bonds is taxed at your ordinary income tax rates. But qualified dividends are only taxed at 15% at the federal level. If your income is less than $39,000, your dividends aren’t taxed at all! This can make a huge different in the amount of money you have left over for expenses over time. It is important to figure out the best place to put dividend payers vs. other types of investments. Do they belong in a retirement portfolio or a taxable account? As your accountant or financial planner about this type of strategy.

Retirement Planning

It’s not enough to just guess what kind of income you will need in retirement and the best allocation to have. We all need a retirement plan that we can look at and update periodically. Many people these days don’t even use a financial planner. They do it themselves. Most are using retirement planning software such as WealthTrace where they are in control of the inputs and can run what-if scenarios any time they like. Imagine knowing just how much you can spend on travel without breaking your plan. We should all be able to dream of vacations, a new car, college funding for kids, etc. But if you don’t have the ability to run scenarios where you change your spending, you will never know if you can afford it.

If you are not a do it yourself type, then hire a financial planner to put together your retirement plan. It is so important to know when you can retire and what it will take to have a successful retirement where you do not run out of money. Don’t guess at this, it’s too important.