Social Security serves as a baseline for providing reliable retirement income. But it’s not enough to cover the desired lifestyle of most retirees. For some, pensions provide an additional layer of income, but they’ve become less common in the past few decades.
Your retirement nest egg is not a finite lump sum of cash. It will continue to grow and provide income as you age. Diversification remains important throughout your retirement years and will protect you in the event a primary income source loses value or becomes unstable. Instead of withdrawing your living expenses from a single source, consider funding your retirement from multiple income streams.
Here are six ways to diversify income streams in retirement.
1. Fixed annuities. A fixed annuity is a financial product sold by insurance companies that guarantees payments to the investor paid on a future date or in regular installments. Annuities come in many varieties and may seem complicated when you begin your research. But a low cost annuity can be tailored to your specific needs and provide stable cash flow to diversify your retirement income.
Make sure to shop around and understand the details and fees before making a purchase. A bad annuity will be laced with fees and expenses that benefit the salesperson. Consider speaking to a fee-only certified financial planner to act as your fiduciary to navigate the complexities and pitfalls of annuities and other retirement income products.
[Read: 12 Ways Retirees Pay Their Bills.]
2. Dividend stocks and ETFs. Dividends stocks are excellent retirement investments for their simplicity, predictable payments and tax advantages, if you can tolerate market fluctuations. Aim to build a diversified portfolio of stocks with long track records of paying and increasing dividends. The S&P 500 Dividend Aristocrats list is a good place to start. If you don’t want to own individual stocks, exchange-traded funds focus on high quality dividend stocks and typically yield higher than a broader index fund.
You can buy dividend stocks in your IRA or taxable investment accounts. Dividends are taxed at lower rates than ordinary income. A married couple filing jointly with an annual income that is less than $75,900 will pay zero tax on dividends and capital gains in 2017. For a single filer, that income cutoff is $37,950.
3. Real estate. Rental properties are another good option to diversify income streams in retirement. Owning real estate has tax advantages and the added potential for appreciation over long periods. Turn an old residence into a rental, or find an undervalued property that generates positive cash flow. Real estate investing is not for the faint of heart, so be sure you’re educated and prepared before buying a rental. Some retirees may have the time and desire to self-manage a rental property, while others may opt for hiring a management company. Expect to pay about one month’s rent for the annual management fee.
For a more hands-off approach to investing, real estate investment trusts provide broad real estate exposure and higher yields than blue chip stocks. Or consider investing via an online real estate crowdfunding platform for investment income and geographic diversification.
[See: How to Pay Less Tax on Retirement Account Withdrawals.]
4. Municipal bonds. Municipal bonds are debt securities issued by government entities such as counties, cities or states. The bond purchaser receives regular payments at a fixed interest rate. At maturity, the purchase amount is paid back in full. Often referred to as munis, the proceeds from these securities are used to fund municipal operations and infrastructure projects for public use.
The most notable advantage of investing in municipal bonds for retirees is the tax efficiency. Municipal bonds are exempt from federal tax and often exempt from tax in the state in which the bond was issued.
Investing in municipal bonds is not risk-free, but they are considered a safe investment vehicle for capital preservation and income. One common strategy is to build a bond ladder whereby the investor buys multiple bonds at varying maturity dates to create a stable income stream.
5. Certificates of deposit. Buying a certificate of deposit is like putting your money in a savings account, except the depositor agrees to leave the money untouched for a set period. CDs are low risk like a savings account, but often earn higher rates of return depending on the term. The depositor receives interest payments for the length of the term, and the initial investment is returned after the term is ended. Early withdrawal of principal from a CD can result in a penalty. Otherwise, CDs usually do not incur fees.
Retirees can build a CD ladder for consistent income using periodic maturities. Interest and principal payments can be used to fund retirement activities or be reinvested into another CD. Longer term CDs, usually up to five years, will pay the highest interest rates. Shorter term CD rates may be lower than a more liquid online savings account, so be sure to compare rates among different savings options.
[See: 10 Ways to Make Extra Money in Retirement.]
6. Part-time earnings. Some retirees find joy in working during their golden years, and a few extra hundred dollars a month can make your retirement more comfortable. Work can be as simple as a retail job at a favorite boutique. Maybe you’ll find creative entrepreneurship to be a challenging and rewarding retirement endeavor. For part-time earnings to be sustainable, choose a job or project that excites you. Test the waters before making a lengthy time commitment. Also, make sure you maintain enough time for your favorite hobbies and leisure activities as your work activity increases.
Craig Stephens is a blogger at Retire Before Dad.
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6 Ways to Diversify Income Streams in Retirement originally appeared on usnews.com
