These financial strategies can produce more income with less risk.
When you retire, you will need to generate enough income to maintain your lifestyle without exposing your assets to too much risk. There are a few ways retirees earn income like 401(k) or 403(b) retirement savings accounts, social security payments, a key source of cash, and some retirees are fortunate to have a defined-benefit pension, an increasingly rare type of plan that pays out like clockwork.
Here are 10 other ways to obtain reliable income while keeping risk in check when you retire.
- Creating a reliable, low-risk income stream is a high priority for many retirees.
- Many income-producing investments can supplement Social Security and retirement plans while keeping risk in check.
- Fixed annuities can provide you a guaranteed income stream, but they are subject to the risk of inflation, which could impact the amount.
- Getting a part-time or gig job that you enjoy can be a good way to supplement retirement income without sacrificing all of your free time.
- You can mix and match these investments to suit your income needs and risk tolerance.
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 after that.1
However, annuities are complex. 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
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.
3. Buy Bonds
Bonds represent debt. So if you buy a bond, it means somebody owes you money and will typically pay 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 building a portfolio of different maturities using a laddering technique.
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 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.