Many people who are in or near retirement have been working on building their retirement savings from the money they get from working. But, what happens when you are no longer working and do not have that source of income any longer? In this article, we will provide you with some helpful information and Retirement Income Tips on how you can generate income in retirement with the right investments.
What Is The Best Investment For Monthly Income?
Retirement means freedom from the workplace, but it also means living on a fixed income for an extended period of time. Taxes, unpredictable investment returns, rising healthcare costs, and inflation can significantly erode the value of your nest egg. You don’t want to run out of money prematurely, so you need a plan to make your nest egg last as long as possible.
What Are The Four Investment Strategies?
Everyone’s situation is different, so retirement income strategies will vary. Here are strategies retirees can use to build a monthly income portfolio:
- Bucket strategy. The bucket approach divides your retirement funds into three buckets based on when you’ll need to access the funds. It’s a growth investing strategy that allocates the first bucket for your emergency fund and money you plan to spend within the next couple of years on living expenses or significant purchases. The second bucket is for money you plan to use within the next three to ten years. Typically, your income investing portfolio in this bucket would consist of bonds and bond-like instruments. The third bucket is for money you don’t plan to use for a decade or more – where your strategy shifts from income investing to growth investing.
- Annuities. Unless you’re a retired public service employee or you worked for one of the handful of companies that still offer a traditional pension, you’re not going to receive a monthly paycheck from your employer for the rest of your life. However, that doesn’t mean that a guaranteed source of lifetime income is an impossible dream. You can create your own pension by buying an immediate fixed annuity. You can buy an annuity that has survivor benefits so that it will continue to pay your spouse after you die. Annuities are oftentimes misunderstood. Take time to understand how they function, as this could be a good component of your income portfolio strategy.
- Tap into Life Insurance. A permanent life insurance policy has two components: the death benefit, which is the amount that will be paid to your beneficiaries when you die, and the cash value, a tax-advantaged savings account that’s funded by a portion of your premiums. With whole life and universal life, the insurance company usually promises that a minimal level of interest, after insurance costs and expenses are deducted, will be credited to your account every year. With variable life insurance policies, you choose the investments and may not get a guarantee. That could provide a cash cushion in case the stock market takes a dramatic downturn, and you want to give your portfolio a chance to recover.
- Getting Income from Your Investments. As discussed earlier, bonds are an excellent source of income. However, depending on what your personal situation is, you should also consider preferred stocks to boost your retirement paycheck to supplement Social Security and other sources of guaranteed income, or to generate cash while you wait for delayed benefits to grow your Social Security.
How Can I Invest My Money To Increase Income?
Investing for Income seems straightforward until you are faced with a simple question: How do you actually generate a monthly income for your investments? Things can become challenging. The hardest challenge that people face as they approach retirement is changing from a “saving” mentality to a “needing” mentality because you need your savings to work for you. Examples of investing for income using your savings include:
- Dividend-Paying (Preferred) Stocks. Companies that pay dividends pay a portion of annual profit to shareholders based on the number of shares they hold.
- Bonds. You have many choices when it comes to bonds. You can own government bonds, municipal bonds, corporate bonds, etc. When purchasing bonds, you need to consider its duration, interest payment, and the creditworthiness of the issuer.
- Real Estate. A prime example of an investment that pays monthly income is real estate. You can own rental properties outright or invest through real estate investment trusts (REITs). Real estate has its own tax rules, and some people are more comfortable with this option because real estate offers some level of protection against inflation. Many income investment portfolios have a significant real estate component because its tangible nature creates lasting value. Psychologically, this provides a welcome peace of mind during market fluctuations.
In summary, there are risks associated with each type of investment in this article. Diversification, however, has proved to be a very effective way to help reduce overall portfolio risk and should be top of mind when creating an income investing portfolio. The biggest danger to an investor seeking greater principal protection with income is keeping pace with inflation, moreover rising healthcare costs. To speak with an Income Specialist contact us now.