Retirees need to know how to generate enough income to maintain their lifestyles without exposing their assets to too much risk. Social Security is a key source of steady cash, and some retirees also have traditional defined-benefit pensions, an increasingly rare type of plan that pays out like clockwork.
- Creating a reliable, low-risk income stream is a high priority for many retirees.
- There are a wide variety of income-producing investments that can supplement Social Security and retirement plans while keeping risk in check.
- You can mix and match these investments to suit your income needs and risk tolerance.
Here are 10 other ways for retirees to obtain reliable income while keeping risk in check.
1. Immediate Fixed Annuities
If you want income with the predictability of Social Security or a pension, you might go to an insurance company and buy an immediate fixed annuity. This is a contract for a guaranteed income stream for a specified time or the rest of your life.
As "immediate" suggests, the insurer starts paying you almost right away, usually the month after purchase and monthly thereafter.
One risk with an annuity is that you might not live long enough to collect a sufficient number of payments to justify the investment. A fixed annuity also subjects you to the risk of inflation, especially if it will still be paying out many years from now. “The good news for an immediate fixed annuity is you have ‘guaranteed’ income/cash flow for life. The bad news is that you don’t know what that ‘guaranteed’ income will be worth,” notes Dan Stewart CFA®, president and CIO of Revere Asset Management, Inc., in Dallas, Texas.
You can also compare what you might get from an immediate variable annuity, in which your payouts are partly tied to an index.
2. Systematic Withdrawals
Since you typically can’t get your money back from an annuity once it starts paying out, you might instead consider an investment account with a systematic withdrawal plan. Such a plan can be established in both retirement and non-retirement accounts. You tell the investment company how much to distribute to you monthly, quarterly, or annually. You keep control of your money, but you don't get the guarantee of an annuity.
“The biggest difference between a systematic withdrawal plan and an annuity is liquidity. Once you pay your premium to the insurance company, you no longer have access to your capital. By creating a systematic withdrawal plan, you’ll always have access to the capital as long as it's been preserved,” says Kevin Michels, CFP®, a financial planner with Medicus Wealth Planning in Draper, Utah.
Even the most conservative investments aren't totally risk-free. Some, for example, face risk from inflation.
Bonds represent debt. So if you buy a bond, it means somebody owes you money and will typically be paying you interest on it. When assembled into a properly diversified portfolio, the safest bonds—such as those issued by the federal government, government agencies, and financially-sound corporations—can be a dependable source of retirement income. One smart approach to bond investing is to build a portfolio of different maturities, using a technique called laddering.
4. Dividend-Paying Stocks
Unlike bonds, stocks represent ownership in a company, and as an owner, you may receive regularly scheduled dividends, such as every quarter. Dividends usually come in the form of cash payments to shareholders. Not all companies pay dividends, though, and dividends can be stopped if a company gets into financial trouble. Also, the retiree must own the stock in order to get paid a dividend and as a result, has market risk. In other words, stock prices sometimes plunge, which could wipe out any of the gains from the dividends.
That's why retirees who buy stocks for income should probably limit their exposure to this strategy and stick with large, stable companies with a long history of paying dividends.
5. Life Insurance
Life insurance really isn't meant to be an investment, but it can be a welcome additional income source for retirees who find they're a bit short each month.
The catch: Loans and withdrawals will reduce the policy's death benefit by a like amount.
6. Home Equity
It's also possible to tap the equity in your home for income, either by selling the home or by taking out a home equity loan, home equity line of credit, or reverse mortgage. However, relying too heavily on the value of your residence to fund your retirement can be dangerous, because home values could drop suddenly and reduce or wipe out your home equity.
Like life insurance, it might be better to think of home equity as a backup plan.
7. Income-Producing 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 much 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.
8. Real Estate Investment Trusts (REITs)
If you like real estate but aren’t into being a landlord or mortgage holder, consider investing in equity REITs, which buy, sell, and manage commercial properties such as malls and apartment buildings.
REIT shares are purchased directly on securities exchanges or indirectly through mutual funds, which contain a basket of securities. REITs often pay high monthly or quarterly dividends.
“Real estate has provided diversification benefits to investors alongside their global stock and bond positions. REITs provide investors access to a diversified bundle of both residential and commercial real estate around the world that is highly liquid,” says Mark Hebner, founder and president, Index Fund Advisors, in Irvine, Calif., and author of Index Funds: The 12-Step Recovery Program for Active Investors.
REITs can be volatile, like regular stocks, so it’s best not to overdo them.
9. Savings Accounts and CDs
When it comes to generating income, there’s nothing safer or more reliable than FDIC-insured bank accounts and certificates of deposit (CD). While this strategy won't produce much income when CDs and savings accounts pay 2% or even less, it can be a fine option when interest rates rise to more attractive levels.
10. Part-Time Employment
Retirees often want to stay active and involved. Working part-time, if you're able to, can be a good way to do that while earning some extra income. And the only thing at risk is your spare time.
The Bottom Line
“Just because you’re retired doesn’t mean you’re not a long-term investor,” says Marguerita M. Cheng, CFP®, CEO, Blue Ocean Global Wealth, Gaithersburg, Md. “And just because you’ve stopped saving for retirement because you’re retired doesn’t mean you don’t need savings.”
The nice thing about these 10 choices is they can be mixed and matched to suit your income needs and risk tolerance. Getting just the right mix might be a bit complicated, so don’t hesitate to consult a qualified financial professional for guidance.