Investing in Equities for Retirement Income

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Investing in Equities for Retirement Income

By: Karl Frank

George and Sherry never had to ask, “what’s next?”
They had always planned everything. But life threw a wrench into their plans when George was let go during the recent economic downturn. George was ready to retire, at least emotionally. The kids were raised, the bills had always been paid, but they just were not certain that retirement was a prudent decision. Furthermore, they were afraid to start income from the investments and just felt like “we were due for a big stock market crash.”
Volatility, Inflation, and Sequence of Returns
Thinking about retirement income can be stressful. The investment options can seem both overwhelming and limited. Overwhelming because there is a huge array and a seemingly endless number of investment solicitations, advertisements and opportunities. And, on the other hand, our investment options seem limited because of today’s low interest rates; very few investments provide the income that many retirees need.

Investing in common stocks, equities, is one way to provide income and growth, but most importantly, growth on the income. Many investors shy away from equities because of three big problems: Volatility, Inflation, Sequence of Returns.
Volatility is not the same as risk
The volatility of stocks can be scary. The headlines often tout the most recent decline and warn of future declines. As we know, bad news sells. The average annual decline of US stocks is greater than 10%, and every four or five years the decline is greater than 20%. Still, the average rates of return for equities are higher than 10%—inclusive of the declines. And, over the past decade, the US stock market is averaging greater than a 14% annualized rate of return.
To address the volatility concern, consider changing your perspective. After a decline, the odds of future higher average annual rates of return increases. The dips are likely short-term, whereas the gain is historically positive over long periods of time. Volatility is the reason equity markets provide greater rates of return compared to other investments. While others are selling, the wise investor is holding—and if possible, buying more—equities because the odds of future gains are in their favor.
In the coming weeks, let’s discuss two risks the long-term investor races: they may need to pull income from the equities during a decline. Another, perhaps bigger problem for a long retirement is inflation. Curious to read ahead?
About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.