Are you approaching retirement? Here is a list of retirement income strategies to choose from and combine to create the cash flow you will need.
Certificates of Deposit and Safe Investments
A certificate of deposit is a deposit certificate issued by banks. They are typically insured by the FDIC, and the longer the term of the certificate of deposit, the higher the interest rates you will receive.
Pros: The principal is safe.
Cons: This strategy will generate very little current income. Income changes with rising interest rates when the certificates of deposit mature and renew, and may not keep pace with inflation. It may require a significant amount of capital to generate the retirement income you need. Interest from certificates of deposit is 100% taxable unless the certificate is held within an IRA or Roth IRA account.
When it comes to choosing between safe investment alternatives, take the time to learn how they can be used as part of your portfolio rather than your entire portfolio. This way, you can use other parts to invest in things that are likely to provide higher income amounts.
Laddered Bonds
A bond is a debt security. You can purchase bonds now that mature at different future points when you are likely to need the income. There are many types of bonds, so you can choose between safe government bonds or high-yield corporate bonds.
Pros: Bonds are likely to yield more income than a certificate of deposit or any other safe investment option. You can match the maturity of the bonds with your cash flow needs. If you have a high tax rate, you can use municipal bonds which are likely to provide you with tax-free income.
Cons: Income may not keep pace with inflation. It may require a significant amount of capital to generate the retirement income you need. Building a bond portfolio on your own can be challenging, so it’s important to understand how to use bond ladders before purchasing bonds.
Dividend-Generating Stocks
Some stocks – known as “dividend aristocrats” – have a history of increasing dividends annually, and some dividend-paying stock funds allow you to invest in a collection of these stocks at once.
Pros: Historically, capital grows, and dividends gradually increase, providing a means to increase your income with inflation. Additionally, many companies pay qualified dividends, which are taxed at a lower rate than interest.
Cons: Capital value fluctuates with stock market movement. Companies may reduce or eliminate dividends during challenging times.
It is important to understand how dividend yield on stocks works before seeking yield.
High-Yield Investments
Some investments offer high returns: these may come in the form of private lending programs, closed-end funds, or limited partnerships. Be cautious – high returns often come with higher risks.
Pros: They generate a significant amount of initial income.
Cons: Capital value fluctuates with market movement. High-yield investments may cut or eliminate their distributions during tough times. High-yield investments are usually riskier than lower-yield alternatives.
High-yield investing can be quite risky. However, sometimes the additional risk provides more income in your account.
Regular Withdrawals from a Balanced Portfolio
A balanced portfolio holds both stocks and bonds – usually in the form of mutual funds. Regular withdrawals provide an automated way to sell a proportional amount of what is in the account each year so you can take money from the account to meet your retirement income needs.
Pros: If done correctly, this approach is likely to generate a reasonable amount of inflation-adjusted income for a lifetime. The equity portion provides long-term growth, while the bond portion adds stability.
Cons:
Capital changes with asset values as the market moves, and you must be able to stick to your strategy during tough times. Additionally, there may be years when you need to reduce your withdrawals.
The balanced portfolio approach is relatively easy to follow and flexible enough to withstand market fluctuations. Study the rules of the withdrawal rate you wish to use to give this approach the best chance of success.
Immediate Annuities
Insurance companies issue contracts called annuities. With an immediate annuity, you receive lifetime income in exchange for a large deposit.
Pros: Lifetime income is guaranteed – even if you live past age 100.
Cons: The income may not keep pace with inflation unless you purchase an inflation-adjusted immediate annuity, which would have a much lower initial return. If you want the highest payout, you won’t have access to the capital, and no remaining capital will be passed on to your heirs.
Immediate annuities can be a good way to secure a lifetime cash flow if you need the highest possible payout from your current capital. Learn all the details of immediate annuities before purchasing.
Lifetime Income Model
This approach uses something called time segmentation to match your investments with the point in time when you will need them. It provides a logical process for how much money to allocate to safe investments and how much to invest in growth-oriented investments.
Pros: Easy to understand and has the potential for great results.
Cons: In its original form, this approach involves taking investment risks, but it can be adjusted so that you can use guaranteed income products.
The “lifetime income” model is a preferred approach for retirement income planning. This type of model is used to fill gaps with a ladder of bonds and growth funds. The gaps can also be filled with other options such as CDs, growth funds, annuities, and so on.
Variable Annuities with Guaranteed Income Feature
A variable annuity is a contract issued by an insurance company – but within the annuity, you are allowed to choose a portfolio of market-based investments. What the insurance company offers is the guaranteed lifetime income feature that ensures you will receive retirement income if the investments do not perform well.
Pros: Guaranteed lifetime income can keep pace with inflation if markets rise. The capital remains available to pass to heirs.
Cons: Fees may be higher than other options – and in some products, fees may be so high that you have to rely on guarantees since the investments are unlikely to earn enough to overcome the costs.
Comprehensive Retirement Asset Allocation Plan
When considering all available options, often the best choice is a plan that uses many of the options mentioned. The goal of a comprehensive retirement asset allocation plan is not to achieve maximum returns – but to maximize lifetime income. This is a different goal from the traditional objective of investment asset allocation, which aims to achieve maximum returns per unit of risk.
Pros: Often, combining many of the retirement income ideas mentioned in this list is what is most needed to create the ideal income flow for your needs.
Cons: It requires a lot of work to assemble correctly, but the planning hours can be well worth the effort for the months and years ahead!
If you are close to retirement, the most important thing to know is that retirement investing must be done differently. You need lifetime income – not hot stock tips.
By now, you should be ready to use these techniques in a coordinated manner. And always remember – planning is not a one-size-fits-all approach. Your unique circumstances and abilities should be considered.
Source:
https://www.thebalancemoney.com/ways-to-generate-retirement-income-2388891
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