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The stock market is often considered risky due to high volatility in the stock market triggered by many factors such as government policies, high inflation, economic slowdown, domestic political unrest and geopolitical tensions, among others. Investing in the stock market becomes even riskier once you cross 60 years of age, as at that age you may have little or no option to top up your retirement corpus fund if you lose that money in gambling.
However, investing in the stock market is not completely off limits as long as you know it is safe to play according to your risk-taking ability. You can determine the amount you are comfortable investing in the stock market while ensuring that your investment portfolio is well diversified to absorb shocks.
When it comes to investing in stocks, many investors struggle with issues such as asset allocation, sector selection, diversification, time horizon, etc.
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Reasons Why Empowering Senior Citizens To Trade Can be an Efficient Approach:
- The luxury of free time
Free time in senior age is ideal for learning about the stock market. There are many online and offline courses that will educate you and help you start or restart your financial journey. Regular traders can equip themselves with more knowledge to help them make sound trading decisions, while those who want to start fresh can learn the basics of investing.
- The wealth of experience and knowledge
After years of honing expertise in their professional fields and gaining a wealth of life experience, seniors are experts at making well-researched decisions. This is why they are likely to do very well in a field like trading. All they need is a little research before investing.
- The tax efficiency advantage
For a long time, fixed deposits have been one of the most preferred investments of most senior citizens. However, interest rates have been falling in recent years and may continue to fall. Interest income is taxed at the same rate as other types of income. In addition, 10% as TDS is pre-deducted in certain cases. Equity investments, on the other hand, may be subject to a lower rate of income tax. Long term capital gains income is taxed at a much lower rate i.e. 10% on earnings above ₹ 1 lakh plus indexation benefit is also available. Dividends also have tax advantages.
By empowering seniors, they can take a big step forward toward investing in the stock market and strengthen their wealth by generating income that has the potential to beat inflation.
Senior Citizens investment Benefits and Limitations in Stock Market
1: What is a stock?
- Attractive Tax Benefit:
Equity vehicles such as mutual funds and direct investment shares are highly tax efficient.
Long-term capital gains (LTCG) tax up to Rs 1 lakh in a financial year from equity investments such as shares and mutual funds is exempt from income tax, while gains above Rs 1 lakh are taxed at 10 per cent. Short Term Capital Gain (STCG) is taxed at the rate of 15 percent.
Low risk investments like debt funds and FDs are taxed at the low rate applicable to senior citizens, so the stock market can prove highly tax efficient for them.
- Low-Risk Options In Stock Investment:
Risks cannot be eliminated, but they can be reduced. By investing in an arbitrage fund, senior citizens can get a decent return that is similar to debt funds and FDs, but at the same time they also get the tax benefit that is available for equity investments.
Arbitrage funds play it safe because they earn a return on the difference between the cash market and the futures market. A return of 7-8 percent per annum in arbitrage funds can be higher than a similar return from FDs and debt funds after considering taxes.
- Beat Inflation:
After retirement, you may not want your pension corpus to erode rapidly due to inflation. So a small exposure to equity assets over the long term can provide a much needed boost to the total return of your investment portfolio.
- Take the help of a financial expert :
A financial expert can help older investors make more informed investment decisions. So if you’re not sure which stocks to invest in, you can always turn to an expert. A professional can guide you in the right direction and help connect your capital investments with your life goals after retirement.
- Pooled investment options :
If you want to further de-risk your portfolio without jeopardizing your equity investments, you can go the route of pooled investments. In other words, you can include equity mutual funds in your portfolio. These funds pool capital from different investors and invest that money in different stocks. Equity funds can be large-cap, mid-cap, small-cap, dividend-paying or growth-oriented. This approach inherently diversifies your equity investments. Plus, professional mutual fund management ensures access to best-in-class research for safer market investments.
- Diversify your portfolio:
While equity investments are volatile, it is possible to reduce the overall risk in your investment portfolio, and diversification is the key to achieving this. The right diversification strategy will protect your investments from the ups and downs of the market. If you are nearing retirement age, a higher exposure to fixed income investments and a moderate dose of equity would be ideal. Below is an example of a diversified portfolio: 30% in fixed income investments; 20% in gold; 30% in pension schemes and 20% in equity. Although this portfolio has equity exposure, the overall risk is negligible due to the allocation of capital across different asset classes.
- Wealth creation for post-retirement :
The stock market, while carrying higher risk, also comes with the potential to offer returns higher than most other asset classes. This potential for wealth creation can benefit your life goals after retirement. With higher returns, you can take the extended tour you’ve been planning or start your own home business without any financial compromises.
Seniors who want to invest in the markets need to know that it is not about avoiding risk completely. Instead, it is about managing market risk as effectively as possible. Here are some tips to help older investors navigate the markets safely.
- Additional income via dividends:
After retirement, seniors do not have a regular source of income to rely on. So it is crucial to set up additional and alternative sources of income to sustain you after retirement. Here, too, the stock market can help you. You can invest in dividend paying stocks or equity mutual funds to get additional income.
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Challenges When You Put Money In Stock Market
Sometimes the stock market can be extremely volatile and seniors may not be able to liquidate their investment due to losses.
Direct investment in stocks requires an expert level of knowledge and patience.
Investing in the stock market may also not be suitable for short-term purposes. If the investment fails, the investor risks losing his capital.
How can senior citizens participate in stock markets without having to worry about volatility and value erosion?
Below are some tips for senior citizens to help them invest in the stock markets without losing sleep:
- By having a disciplined approach
This means that it would be wise to limit exposure to stocks; depending on how much the person would set aside as funds not immediately required. Only a certain portion, say 20%-25% of the total corpus (or what can be saved for 5 years or more) could be earmarked for investment in shares and related instruments.
- By taking a pooled investment approach
It is always better to invest in collective investment vehicles such as mutual fund schemes that allow an individual to diversify risk by investing in a basket of stocks. For the stated purpose, one can ideally choose to invest in programs / funds that invest in large-cap stocks.
- By spreading the investment time horizon
Most seniors have access to large sums of money that they get through pension benefits from employers, subscriptions to pension products when they were young, etc. As a result, allocating these funds to financial products could become an exercise prone to a timing problem. This can be eliminated by investing using a systematic approach. For example, mutual fund schemes allow for systematic transfer to any scheme, which would reduce the time risk of a lump sum investment in stocks, thereby reducing the risk of high volatility to a large extent.
- By looking at quality and going for dividends
When experienced investors reach retirement, they typically invest in high-quality companies with a proven track record of paying dividends. This allows for a number of benefits; first of all, it is a regular annual income in the form of dividends, it helps the person to save on tax (all dividends are tax-free in the hands of investors) and helps to protect the principle in the longer term. Of course, this would take some tracking and monitoring of company performance; at least on an annual basis.
- By looking for high liquidity in the investments
Stock markets provide very high liquidity. Unlike many traditional investments, which tend to have lock-in periods and early withdrawal penalties, investing in equity market MF schemes or direct exposure will keep the investment highly liquid. This would help in case of urgent need for funds.
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2 Reasons Stocks Are Still Great Investments for Seniors
You may have been told that you shouldn’t invest too much in stocks as you get older, because their volatility could put older investors at risk of huge losses when they need their savings the most. While this is true, it’s a mistake to assume that seniors should move their money out of stocks entirely. Stocks can still be a great investment for older adults, and below we’ll look at a few reasons why.
1. Stocks have greater earning potential than bonds
There is certainly a risk of investing too much in stocks as you approach retirement, but there are downsides to not investing in them. The stock market’s average annual return over the past 10 years has been about 13.9%. In contrast, the average return on bonds is usually only between 5% and 6% per year.
By moving all of your savings into bonds, you reduce the risk of losing what you already have, but missing out on the bigger gains that stocks offer comes with a real opportunity cost.
For example, let’s say you’re 60 years old and have $750,000 in retirement savings so far. If you invested all that money in bonds and left it there until you retired at age 65, you’d have just over $1 million if you earned a 6% average annual rate of return. Not bad, right?
But if you invested 50% of that money in stocks and 50% in bonds, you’d end up with more than $1.1 million if your stocks earned a 10% average annual rate of return (and the same 6% for bonds). And that’s assuming you don’t contribute any more money to your account between now and retirement. If you were to post regularly during this time, you could end up with a lot more.
Pulling all of your savings out of stocks slows the growth of your nest egg, forcing you to put away more of your own money each month to reach your retirement savings goal. If you are unable to save enough, you may need to postpone your retirement date. Keeping some of your savings in stocks can help you reduce this risk.
2. Dividends could provide extra income in retirement
Some businesses are so successful that they make more money than they can effectively reinvest in their companies. If you own stock in one of these companies, you may receive a dividend, usually once a quarter. Dividends are excess capital that businesses pass on to their shareholders.
The amount of money you receive from dividend stocks varies depending on how the company has performed and how many of its shares you own. You don’t have to receive a dividend every quarter, but doing so can provide you with an additional source of income beyond the stock yield.
You can either spend your dividends or reinvest them in stocks to help your savings grow even faster. If you’re holding dividends in a retirement account and aren’t ready to withdraw them yet, it probably makes more sense to reinvest them.
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How much of your savings should be invested in stocks?
So now that you understand the benefits of investing in stocks as a senior, the next question you’re probably asking yourself is: How much should I invest in stocks? Everyone has to come up with their own answer based on their risk tolerance and retirement timeline, but the general rule of thumb is to invest 110 minus your age in stocks.
So if you are 50 years old, you would invest 60% of your savings in stocks and 40% in bonds. When you turn 51, you should adjust your asset allocation so that 59% of your savings are in stocks and 41% in bonds.
The old rule of thumb was to invest 100 minus your age in stocks, but as people live longer they need more money for retirement. Keeping more money in stocks for a longer period of time increases their chances of having enough saved.
You can use the “110 minus your age” rule as a starting point, but know that the best asset allocation for you may be different. If you don’t plan to retire for many years, you may be able to keep more of your money in stocks because you can recover from a market crash before you need your savings. So consider your individual situation when deciding how to split your portfolio.
Why Stock Market Education is Important
We all know that stock market education is important. But what exactly does it mean to educate yourself on the stock market? And why is it important to investors? In this article, we’ll explore some of the ways that stock market education can help you make better decisions and build your financial knowledge.
The stock market is a complex system and you can’t just jump in and start trading. You must always know what you are doing. A stock market education will help you make better decisions by giving you the tools and knowledge necessary to succeed as an investor.
Stock education helps you understand why something is important, such as knowing when it’s time to sell or buy a stock based on recent price changes.
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FAQs
Should senior citizens invest in stock market?
Seniors can use the amount they are comfortable with to invest in the stock market while ensuring their investment portfolio is well-diversified to absorb market shocks.
Should a 70 year old be in the stock market?
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
Should a retired person invest in stocks?
Over the long term, stocks outperform bonds. So, stock market investments should be one component of a plan you use to prevent your savings from running dry before the end of a retirement that can last 20 or 30 years or longer.
At what age should I stop investing?
As there’s no magic age that dictates when it’s time to switch from saver to spender (some people can retire at 40, while most have to wait until their 60s or even 70+), you have to consider your own financial situation and lifestyle.
