The continued volatility in the equity markets has resulted in substantial investment losses for many retirees. Consequently, a large segment of the senior population is now seeking more stable alternatives for their investment portfolios. Fortunately, there are several choices available for those who need growth and income that they can count on in their declining years.
TUTORIAL: Retirement Planning Basics
1. Fixed Annuities
These contracts are guaranteed for interest and principal by the insurance carrier and are often backed by reinsurance policies in the event that the carrier becomes insolvent. They also usually pay slightly higher rates than CDs. Fixed annuity rates are also likely to rise over the next few years, making these an even more attractive vehicle. (Learn about this popular retirement tool, its pros and cons and how annuities work to create a guaranteed regular stream of retirement income. Check out Calculating The Present And Future Value Of Annuities.)
2. Variable Annuities with Guaranteed Income Riders
Those who own variable annuity contracts can rest easy if they have purchased one of the guaranteed income riders that are now widely available from most carriers. These riders assure the contract owner that a guaranteed sum of money will be paid, usually on a monthly basis, regardless of how the underlying subaccounts perform. However, certain conditions may apply, such as the inability to make a large lump-sum withdrawal from the contract. The contract may also have to be annuitized before payments can begin, which means that an irreversible schedule of payments will begin after the contract is converted into annuity units.
This tried and true standby can still provide steady interest and guarantee your principal. Because interest rates are low, this is a good time to create a laddered portfolio of CDs that allow the investor to reinvest each CD as it matures at a higher rate when rates start to rise again. FDIC insurance also now stands at $250,000 per account, thus allowing savers to place much larger amounts in a single CD. (Laddered certificates of deposit offer safe capital and predictable cash flow, while bringing simplicity to your portfolio. Check out How To Create A Laddered CD Portfolio.)
4. Private Lending
The fallout from the Subprime Meltdown in 2008 has resulted in legislation that makes it more difficult than ever to qualify for purchasing a home. This has effectively opened up the market for private lenders who can provide funding for prospective borrowers who cannot qualify for a loan from a bank or other traditional lender. Private lenders can earn a higher rate of return than CDs or other guaranteed instruments with a minimal amount of risk if proper precautions are taken.
5. Utility Stocks
Modern civilization cannot function without clean water and energy, and this translates into consistent income for investors. Utilities have paid steady dividends to shareholders for decades, and this trend is not likely to end any time soon. Utility stock prices have remained relatively stable over time as well, which makes them a good choice for conservative investors seeking higher income.
6. Preferred Stocks
Resemble utility stocks in that they pay high dividends and remain stable in price. Preferred offerings also provide greater safety for investors in that they precede common stock in the reimbursement process if the company is liquidated. Preferred stockholders receive their money before any common stockholders are reimbursed whenever a publicly-traded company declares bankruptcy.
7. Corporate Bonds
Although these are not guaranteed by the U.S. government, they pay higher rates of interest than Uncle Sam, and are still relatively secure instruments in most cases. Of course, the safety of these notes will vary with the financial stability of the issuer, but any investment-grade bond (rated BBB or higher) is a reasonably safe bet.
The Bottom Line
These are just some of the alternatives that are available for those who need consistent income from a source that lets them sleep peacefully at night. For more information on stable sources of income during retirement, consult your banker or financial advisor. (Generating income without going to work tends to be a murky concept. Find out how it works. See 5 Ways To Fund Your Retirement.)