The vast majority of people save money to become financially secure when they retire and have no source of work income.
If you want your retirement savings to produce a consistent income that beats inflation, while still meeting your risk tolerance goals, here are five time-tested investment strategies you should consider.
Total return portfolio
A widely accepted strategy to generate retirement income is to build a portfolio of index funds, which covers both stocks and bonds. You might seek guidance from a financial advisor to create a balanced total return portfolio.
The goal should be to earn a reasonable long-term return on investment while following a systematic withdrawal plan. The principle behind a “total return” portfolio is that your average annual return over a 10 or 20 year period exceeds or at least meets your withdrawal rate.
An annuity plan generates regular income for you. This could be an ideal investment strategy when you need a stable income stream during retirement.
With immediate annuities, you pay a lump-sum amount to the insurance company in exchange for a guaranteed income over a specified time period or for life.
You will have the option to invest in fixed or variable immediate annuity. Some of these plans offer income linked with inflation, where you will start with a lower monthly payment, but it will increase as inflation rises.
You might consider a fixed-term payment, single life payout or joint life payment if you are married and wish to secure retirement for you and your spouse.
Individual bonds or bond funds
Bonds are issued by the government, municipalities, and private companies to raise long-term financing.
By investing in a bond, you are essentially loaning your funds to the borrowing entity that will pay you a predetermined rate of interest for a specified time period. Upon maturity, you will get back your principal amount.
Depending on your retirement assets, risk appetite and portfolio diversification needs, you can choose between high-yield bonds, lower risk government bonds, or perhaps floating rate bonds, which offer an adjustable rate of interest.
You could purchase individual bonds invest in bond exchange-traded funds (ETFs) or buy bond mutual funds.
Dividend income funds
Unless you have the time and skills to invest in individual dividend-paying stocks and manage your own portfolio, you may consider investing in a dividend income fund for your retirement.
These funds buy and manage a range of dividend paying stocks on your behalf. Stocks of large corporations with stable cash flows and a long track record of paying dividends can prove to be a solid retirement income source.
A number of publicly traded corporations pay “qualified dividends,” which attract a lower tax rate than the regular sources of income. Therefore, from a tax planning viewpoint, it may be prudent to hold funds that generate qualified dividends outside of your retirement accounts.
REITs or real estate investment trusts
REITs operate like a typical mutual fund, except that a REIT invests in income-generating real estate properties instead of stocks and bonds.
The REIT will appoint a professional team to manage its portfolio of properties, pay the taxes, insurance and maintenance expenses, and collect rentals from the tenants.
The net income after expenses is distributed proportionately between the REIT investors. As a retirement investment, a REIT could be a salient option if you are seeking portfolio diversification.
From a tax-efficiency standpoint, it is usually a prudent idea to hold a REIT investment within an IRA or another tax-deferred retirement account.