The following is a guest post by Adnan from The Simple Quid. If you’re interested in sharing your work on Disease Called Debt, please get in touch!
The UK is undergoing pension reforms and one of the most important changes to be implemented is to allow retirees to get their pension pots in cash without actually going for the option of annuities.
This move is considered as good by many as it will allow pensioners to actually get hold of their money rather than been forced to subscribe to low return annuities.
With more money in hands however, pensioners may be tempted to self-invest in stocks at a time when they may require more income than assets. Retirement is a time when normally assets are consumed as more people will be requiring cash to support their living. Retirement however, is also the time when an individual has more time to try his hand at self-investing in stocks through online portals and other means.
Whether to invest in stocks or not during retirement?
There are two schools of thoughts on this and both have their reasons to believe that investing in stocks after one retires can be beneficial or detrimental for pensioners. Those who support the view of investing in stocks also include Warren Buffet who suggests investing 90% income in very low cost stock fund and 10% in short term government bonds. But this advice from Warren Buffet is for the trustees of his wife’s estate if he dies, leaving a significant amount for his wife to be managed by those who know a bit about investments.
In short, knowing how the stock market works and how to play with your money in the stock market is the key for someone who may be planning to invest in stocks once he has his pension pot in his hands.
The common advice by those who suggest investing in stocks during retirement is to be more conservative and invest in dividend stocks which can help generate regular cash flows for pensioners.
One thing most retirees often ignore after they start trading stocks during their free time is that they may not be the experts in the field of investment. A retiree can be an excellent doctor or a PhD in molecular biology but he may be poor at understanding the world of the stock market and its details.
The intellectual challenge to beat the market can be strongest temptation for retirees to be deal with. Studies clearly indicate that education can be strong proxy for stock ownership therefore specially highly educated retirees may fall into the trap of playing the market rather than using it for generating significant income.
Another rule of thumb is whether a retiree has at least 3 years of income secured through safer investments or not. If you are not covered for the period of at least 3 years, it is quite a bet to invest in stocks. This advice seems plausible specially to ensure that retirees don’t have to actually sell their stocks low during hard times.
Investing in stocks also seems a better option if inflation is on the rise as real rate on your other investments may be low in such situations. In order to protect yourself during times when prices are increasing, investing in stocks can be a good option. However, considering the doubts of deflation in UK, it may not be a wiser option to exercise by retirees.
Another good reason which may compel many retirees to go for stock investing is the option of transferring wealth to their children. In such a scenario, you will not be requiring income and can easily transfer shares to your children to hold them for selling on profit. But inheritance taxes on such transfer and realization of the proceeds can decrease the overall return your children might be getting on your transferred investments.
However, if you do not plan to transfer the wealth to your children, investing in stocks can be relatively riskier. As we age our ability to take risks decline because our time horizon shrinks. Each passing year means we have fewer years to live therefore our natural investment orientation becomes conservative. In such circumstances, it is more plausible to play safe rather than bet in a market with strong short term volatility.
If you are a retiree or retiring soon and considering investing in stocks as one of your activities in free time, always follow the principal of never indulging in something which you don’t know with a high degree of confidence.
Author Bio: Adnan is the founder of UK based Personal Finance Blog The Simple Quid and writes about personal finance, entrepreneurship & career on his blog and other websites.
*Image courtesy of Flickr