For many investors, retirement planning is all about watching their nest egg grow. But an equally daunting challenge is putting those investments to work to deliver an effective stream of income once your working days are through.
According to 2016 data from the U.S. Census Bureau, the median household income of Americans aged 65 to 74 is $47,432 annually. And for those over age 75, the outlook is even bleaker with a median income of just $30,635.
Even before taking into account the higher cost of health care as you age, that sum may not be enough to do all the things you want in retirement. One important element, then, is simply to find the best ways to put your investments to work so that they deliver income over time. Here are seven options for investors looking to draw income from their savings instead of just drawing those savings down.
Treasury bonds. The go-to income investment for many retirees is a U.S. Treasury bond. In a nutshell, you’re lending money to the federal government in exchange for regular interest payments back from Uncle Sam.
[See: 7 of the Best Stocks to Buy for 2018.]
And thanks to the portal TreasuryDirect.gov, an extension of the U.S. Department of the Treasury, it’s easier than ever before to invest directly in Treasurys. There are also plenty of bond funds for those who want the option to sell early instead of holding these bonds to maturity. For instance, the Vanguard Long-Term Treasury Fund (ticker: VUSTX) holds a basket of Treasury bonds that mature 10 to 30 years down the road.
Unfortunately, however, the current low interest rate environment means that these government bonds aren’t quite yielding what they used to. The current rate for 10-year U.S. Treasury bonds is about 2.3 percent.
Investment-grade corporate bonds. If you’re looking for a bit more yield, you could also try corporate bonds. While there’s a little bit more risk involved, you will also get a little more income in return for your investment. For instance, the Standard & Poor’s 500 Investment Grade Corporate Bond Index yields about 3 percent right now.
Almost all brokerage accounts these days allow you to invest directly in corporate bonds, but it’s often difficult for investors to uncover detailed information about specific bonds. Yield, maturity and other terms can vary widely even with bonds offered by the same corporation.
However, there’s no shortage of bond funds and exchange-traded funds, like the iShares iBoxx $ Investment Grade Corporate Bond ETF ( LQD). The fund has an expense ratio of 0.15 percent, or $15 per $10,000 invested annually.
This fund yields 3.2 percent and holds the debt of mega-corporations including JP Morgan Chase & Co. (NYSE: JPM) and AT&T ( T), among others.
Junk bonds. For aggressive investors, “junk” bonds are those offerings that do not receive ratings high enough to warrant “investment grade.” There are often good reasons for this, such as an already high debt load that puts the company at risk, or broader corporate issues that raise red flags with analysts.
The good news about junk bonds, however, is that they pay significantly higher dividends in exchange for the higher risk of default. For instance, the SPDR Bloomberg Barclays High Yield bond ETF ( JNK) offers a current yield north of 6.1 percent — more than double that for U.S. Treasurys. It has an expense ratio of 0.40 percent.
There is risk here, but a diversified bond fund like JNK helps protect you from a big loss if one particular bond defaults.
Dividend stocks. If you are comfortable with taking on a bit more risk in pursuit of yield, the next place to look for income potential is in the equity market instead of the debt market. While bond holders have priority over stock holders if a company ever gets into trouble or declares bankruptcy, a number of quality dividend stocks have such a long history of payouts that they aren’t quite as risky.
[See: 7 Overlooked Large-Cap Dividend Stocks.]
For instance, energy giant Exxon Mobil Corp. ( XOM) has been paying dividends for more than a century and offers an annual yield of about 3.7 percent.
Of course, just because a company has a history of paying dividends doesn’t mean the future is always bright. Investors in General Electric Co. ( GE) have learned that lesson the hard way as the one-time dividend darling slashed payouts by two-thirds during the Great Recession, and slashed them in half again a few months ago.
Preferred stock. Splitting the difference between dividend stocks and bonds is a kind of hybrid investment known as preferred stock. This is a special class of stock that comes with exclusive terms, resulting in significantly higher yields than common shares.
A prime example is the preferred stock from Bank of America Corp. ( BAC) that Warren Buffett and his iconic Berkshire Hathaway (BRK.A, BRK.B) holding company bought in 2011 after the financial crisis. Berkshire was granted shares that delivered a stunning 6 percent annual yield. At the time, BofA stock paid just a penny per quarter in dividends good for less than 0.05 percent in annual yield.
That’s the power of preferred stock if you can get it. But since most investors can’t access this asset class alone, the most effective way isn’t to buy preferreds directly but instead to invest in them via an exchange-traded fund like the iShares U.S. Preferred Stock ETF ( PFF). Its expense ratio is 0.47 percent.
Diversified income funds. Can’t choose which asset class suits you best? Well, neither can a lot of money managers. And the result is a wide variety of income-producing funds that look for total return through a mix of bonds, stocks and other investments.
One example is the Madison Diversified Income Fund ( MBLAX) that is about 50 percent stocks, 10 percent U.S. Treasurys and 14 percent corporate bonds, with a smattering of other investments, too.
There are also funds that take a more narrow approach, such as the Vanguard Total Bond Market Index Fund ( BND), which owns short-term and long-term bonds from both corporations and the government. There are no stocks here, but as the name implies it is a play on the total bond market instead of just one flavor.
Real assets. A truly diversified portfolio, however, isn’t limited to just stocks and bonds. Whether you buy these assets directly or via a diversified fund, you’re still overlooking alternative assets that can provide an added boost to your income or some stability if more conventional investments take a turn for the worse.
From royalties on intellectual property to rent checks from real estate, there are many ways to make significant annual income off of real assets. And in most cases, that yield is going to be significantly higher than those for conventional dividend stocks and bonds.
[See: 7 Utility Stocks with Powerful Dividends.]
These alternatives can have drawbacks, of course, such as a lack of liquidity if you want to sell. But for long-term income investors looking holistically at their portfolio, real assets are worth a look.
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7 Ways to Invest for Income originally appeared on usnews.com
