The idea of including stocks in a retirement portfolio scares some people. Why? Stocks increase and decrease in value so you never know exactly how much you can count on. While this is true, it does not mean a retiree or someone planning for retirement should not consider including stocks as part of their plan. In fact, the variability of investment returns is one of the reasons a person usually should include stocks.

What is a stock investment? How does it work?

Stocks are a type of financial security (also called equities). A stock investment is when you purchase shares in a specific company, making you a partial owner of that business. When you invest in stocks, you’re buying a piece of that company's equity, meaning you can benefit if the company performs well through stock price appreciation and dividends. 

Stock investments carry risk, since their value can fluctuate depending on the company’s performance and market conditions. However, they also offer the potential for significant financial growth over time.

Why should I include stocks in my retirement portfolio?

In years past, people generally only lived 10-15 years in retirement. They also had employer-provided pensions to build an income base on which they could live. That is no longer true. Some people do have employer-provided pensions, but many do not. On top of that, average life expectancy continues to rise. It is not unusual for adults to live into their late 80’s or 90’s. Depending on when a person enters the retirement period, that may mean having to fund 20 to 30 years of income. As a result, most people have not accumulated as much money as required to fund their retirement income needs.

What about Social Security? We can assume most older adults will have an income base from Social Security that will help, but it is unlikely to cover all expenses. According to Nationwide's Peak Retirement Survey, more than 1 in 3 retirees receive less in Social Security benefits than they expected to when working. And these benefits replace less than half of pre-retirement income, according to 84% of retirees surveyed. One quarter of retirees said Social Security covers less than 10% of their previous income.¹

Here's an example of how investing in stocks can help boost your retirement income: Let's assume your Social Security retirement monthly benefit is $1,200. Let’s go a step further and say at the beginning of your retirement income period, your overall monthly income need is $4,200 ($50,400 annually).

With Social Security covering $1,200 you have to fund $3,000 each month. If we include average annual inflation of 2.5% (which we should) and you live 25 years in retirement, you will need to save a little more than $750,000 by the start of your retirement period (if you earn 4% annually on your investments, which is about what you will earn using fixed income and government securities). If you start saving 20 years prior to retirement and earn that same 4% you will have to save a little more than $2,000 each month to accumulate $750,000.

However, if you invest in stocks that have an average annual return of 8% the scenario changes. First, the amount required to fund your retirement income need will reduce from about $750,000 to a little less than $500,000. Additionally, instead of around $2,000 a month you will need to save less than half that amount.

How can your investments earn 8% annually? Invest in large capitalization (well-established) companies. You might have heard about the S&P 500 market index. It is used to track those large companies. Over long periods of time, their stocks have returned about 8% on invested dollars.

This is not to say a plan like this is right for you. Every person and situation are different and may require a different approach. As a result, it’s a very good idea to discuss your situation with a qualified, trusted advisor before moving forward. However, the principle is sound. To help you accumulate the money you will need to live in retirement, investing in stocks—especially large capitalization domestic companies—will help you get it done. [Note: investment returns are compounded monthly and annualized.]

Need more retirement guidance? 

There’s no need to navigate the retirement planning journey alone. If you have an employer-sponsored plan like a 401(k) or 403(b) or SIMPLE IRA, ask your plan provider what tools, resources, and/or experts are available to assist you.

You might also consider talking to a qualified financial planner. They will help you take all factors into account—such as your long-term goals, tax considerations, and various investment strategies. Together, you can come up with a personalized retirement plan focused on creating the future you’ve always envisioned. 

Visit NCOA’s Work & Retirement Pathways resource library to learn more about creating financial security in retirement. 

 

Sources

1. Nationwide Peak Retirement Survey Report (PPT). December 2023.