Why You Can’t Just Bank on Dividends for Retirement Income

You need a multi-layered plan with different types of assets and income streams. You’ll often hear that it’s important to hold different investments in retirement that allow you to continue generating income. After all, Social Security is facing possible benefit cuts, which may result in a lower monthly benefit for you down the line. And even if Social Security cuts don’t come to be, those benefits will only replace about 40% of your pre-retirement income if you earn an average salary. If you’re an above-average earner, you’ll get an even smaller amount of replacement income, percentage-wise. And while retirees can often get away with having less than 100% of their former paychecks, they generally need more than 40% to live comfortably. That’s why you may be inclined to put money into dividend stocks ahead of retirement and hold them during your senior years. That way, you can use those ongoing payments as a means of covering your retirement expenses. Holding dividend stocks is indeed a good way to supplement your Social Security income. But you should definitely branch out beyond there.

Don’t rely too heavily on dividend stocks

It’s definitely not a bad idea to keep dividend stocks in your portfolio during retirement. But they should be one of several assets you invest in during that time. For one thing, stocks in general tend to be volatile. And as a senior, it’s a good thing to keep some of your money in assets whose value is less likely to swing wildly, like bonds. That’s just one reason to not go overboard on dividend stocks. Another reason is that dividend payments are not guaranteed to come your way. When you invest in bonds, the entities that issue your bonds are contractually obligated to pay you interest at preset intervals. This doesn’t mean those entitles can’t or won’t default on those interest payments. But at least they’re included in the terms of your bonds when you make that investment. Companies that pay dividends to stockholders, on the other hand, are not required to do so. And they’re certainly not obligated to uphold a specific dividend. So what might happen is that you load your portfolio with dividend stocks, only to find that in time, some or all of those companies end up shrinking their dividends or halting the practice of paying them altogether. That’s why dividend stocks should be one of several income streams you line up for yourself during retirement. Your aim should be to spread your assets around so you’re generating income from different investments — bonds, index funds, and maybe even real estate, if you have the appetite for it.

Branching out is always a good thing

Just as it’s important to maintain a diverse investment mix when you’re younger, so too is it important to have one when you’re older. That means not becoming overly reliant on dividend stocks, but instead making them one of several assets you turn to as a means of supplementing the benefits you collect from Social Security and ensuring you have enough income for a comfortable retirement.