A robust and predictable income is a big concern for retirees. They need to know how to generate enough cash to maintain their lifestyle without exposing their assets to too much risk. Social Security is obviously a key source of steady cash for retirees and some also have a pension, an increasingly rare employer-sponsored retirement plan that pays out like clockwork. Here are 10 other ways for retired folks to obtain reliable income while keeping risk in check.
Tutorial: Retirement Planning Tutorial
1. An Immediate Fixed Annuity
If you wanted the predictability of Social Security or a pension, you might go to an insurance company for an immediate fixed annuity - a contract for a guaranteed income stream for a specified time. As "immediate" suggests, the contract starts paying you virtually right away, usually the month after purchase and monthly thereafter.
2. Systematic Withdrawals
Since you typically can't get your money back from an annuity once it starts paying out, you might simply put the money in an investment account with a systematic withdrawal plan. Such a plan can be established in nonretirement and retirement accounts with a form instructing the investment company what sum to distribute monthly, quarterly or annually. You keep control of your money but you don't get the guarantee of an annuity.
Bonds represent debt. So if you buy a bond, it means somebody owes you money and is regularly paying you interest. When assembled into a properly diversified portfolio, the safest bonds like those issued by the federal government, government agencies, and financially sound corporations can be a crucial source of dependable retirement income. (To learn more about bonds, check out our Bond Basics Tutorial.)
4. Dividend-Paying Stocks
Unlike bonds, stocks represent ownership and company owners may get regularly-scheduled dividends. Not all companies pay dividends, though, and dividends can be stopped if a company gets into financial trouble. Plus, stock prices sometimes plunge. That's why retirees who buy stocks for income should probably limit their exposure to this strategy and stick with large, very stable companies with a history of paying dividends.
5. Life Insurance
Life insurance really isn't meant to be a retirement plan, but it can be a welcome additional income source for retirees who find they're a bit short each month. The safest policy for the job is one like whole life or universal life that builds cash value on a schedule. People generally access the cash via loan or periodic withdrawal. The catch: loans and withdrawals reduce the policy death benefit by a like amount.
6. Home Equity
Relying too heavily on home equity to fund your retirement can be dangerous because home values could drop suddenly and reduce or wipe out your equity. Like life insurance, it might be better to think of home equity more as a backup plan. You can access it by selling your home or taking out some sort of home equity loan.
7. Income Property
Retired or not, it's nice to get that check each month when you rent out a home or sell one to someone and hold their mortgage (just like a bank). But it's not so fun if the renter or homeowner doesn't pay you. And remember, if you're a landlord, you're on the hook for property taxes and costs for upkeep. (For more, check out Simple Ways To Invest In Real Estate.)
8. Real Estate Investment Trusts (REITs)
If you like real estate but aren't into being a landlord or mortgage holder, consider investing in REITs - companies that buy, sell and manage commercial properties like malls and apartments. REIT shares, which are purchased directly on securities exchanges or indirectly through mutual funds, pay high monthly or quarterly dividends and are liquid. But they can be volatile like regular stocks, so it's best not to overdo them.
9. Savings Account and CD Interest
When it comes to generating income, there's nothing safer or more reliable. While this strategy obviously isn't viable when CDs and savings accounts pay 2%, 1% or even less, it can be a fine option when interest rates are reasonable.
10. Part-Time Employment
Retirees often want to stay active and involved. Working part-time can be a good way to do that while earning extra income. And the only thing at risk is some time.
The Bottom Line
The nice thing about most of these 10 methods is they can be mixed and matched to suit your personality. However, knowing exactly what to do and getting just the right mix can be a bit complicated, so don't hesitate to consult a qualified financial professional for guidance. (For more retirement tips, see 5 Ways To Fund Your Retirement.)
Stock AnalysisFind out the present day value of your investment in Gilead Sciences and the amount of shares you would own if you had invested during its IPO.
Stock AnalysisFind out how much your investment would be worth if you had invested $1,000 during Costco's IPO and how much you would have received in dividends.
RetirementDiscover why funds with low expense ratios are important for retirement portfolios, and find out about some of the lowest cost options available for a Roth IRA.
RetirementDiscover how time and compounded growth of earnings can help even a modest 401(k) plan balance grow to a significant sum over a period of 20 years.
RetirementLearn how to decide between a traditional or Roth version of the 401(k), 403(b) or 457(b) retirement plans to help you build your nest egg.
Mutual Funds & ETFsExchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
Investing BasicsHere's everything you need to account for when calculating the present and future value of annuities.
RetirementSpending your retirement years in Ecuador can be an affordable and attractive proposition, provided you know the country's laws.
Personal FinanceHere are the simple financial Ten Commandments that, when faithfully followed, can lead to a secure economic future.
RetirementIt can be beneficial in any number of ways: mentally, occupationally and even financially.
Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
Dental insurance coverage may vary according to the type of plan and the level of benefits that you have elected. Most dental ... Read Full Answer >>
Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>