Investors can’t count on Social Security.
It’s official: Social Security costs more to run than it generates in income. It expects to tap its reserves this year. By 2034, those reserves will be depleted if further action isn’t taken. It’s unclear what this action may be: Raising the full retirement age? A reduction in benefits? No benefits? What is clear is today’s retirees need to take retirement income into their own hands. Most retirees want four to five sources of retirement income, with living expenses covered by guaranteed sources, says Spencer Betts, a CFP board ambassador and financial planner at Bickling Financial Services. Here are seven retirement income sources that could foot the bill.
Annuities provide guaranteed income you can’t outlive.
“Guaranteed income in retirement helps create peace of mind,” says Ken Nuss, founder and CEO of AnnuityAdvantage. Other investments may boast higher rates of return, but only annuities can guarantee their promises. If you need the income now, a single premium immediate annuity can provide “guaranteed income you can’t outlive,” he says. If you don’t need the money today, a deferred income annuity lets you wait to take income until a future date. If you don’t know when you’ll need the income, an income rider can let you postpone that decision until later. Riders come at additional costs, however, so be careful to review any contract in full before signing.
Invest in real estate for inflation protection.
Many retirees turn to real estate for income, be it buying and managing rental property or using REITs, Betts says. Real estate gives you income plus more potential capital appreciation than bonds. With a real asset at its back, it also provides a degree of inflation protection, which is important for retirees grappling with the rising cost of living. On the other hand, if property values fall, your investment will fall with them. What real estate doesn’t provide is a lot of liquidity, so make sure you have enough other resources to cover unanticipated costs. Always read the prospectus and research what’s available to you before investing in REITs, Betts adds.
Reverse mortgages convert your home’s equity into income.
Reverse mortgages are a less common but viable method of income generation for seniors, says Troy E. Jones, ambassador for the CFP Board of Standards and CEO of Oklahoma City-based Access Financial Resources, Inc. A reverse mortgage allows you to convert the equity in your home into an income stream. Terms and costs vary and you must meet certain criteria such as being at least 62 to qualify, Jones says. Only home equity conversion mortgages through an FHA-approved lender are federally insured. Jones created an in-family reverse mortgage for his client by having her bequeath her house to her daughter in exchange for regular payments.
Bonds are the classic choice for retirement income.
Bonds are the classic play to create a nice income stream for retirees. When bonds mature, simply roll the proceeds into another bond to keep the game going, says Mary Ellen Hancock, senior wealth strategist at PNC Wealth Management. The question is what type of bonds to use: High-yield bonds provide more income but also more risk. Treasurys are price-stable but pay pittance in interest. If you hold the bond to maturity, price fluctuations won’t affect you, but bond mutual fund investors should be wary as funds may sell before maturity. High tax-bracket investors often covet municipals because income is state and federal tax-free for residents of the issuing state.
Dividend stocks provide growth and income.
Retirees usually shy away from stocks as too risky. While they are more volatile than bonds, the other, potentially bigger risk retirees are contending with is longevity risk. 20-plus years is a long time to go from your last paycheck, says Colin Devine, educational advisor for the Alliance for Lifetime Income, a nonprofit educating Americans about protected lifetime income. You’re going to need portfolio growth to keep up with inflation. Hancock always discusses a dividend portfolio with her clients. She looks for good companies paying consistent dividends in the 2 to 4 percent range. Quality is important here: You want a solid company backing that dividend to make it sustainable.
Use the capital gains from growth stocks for income.
While growth stocks don’t pay much income, they can provide capital gains. Selling your winners can be a good way to generate income, Betts says. If you held the stock for more than 12 months, you only pay capital gains taxes on the proceeds. Since taxes can take a big bite out of retirement income, future retirees should be on the lookout for ways to increase “what stays in your pocket,” Hancock says. She likes to see retirees with half their assets in non-retirement accounts.
Let someone else do the work for you with target-date funds.
Even target-date funds can provide income in retirement, Devine says. “There’s no sunset date when [managers] liquidate the funds,” so retirees can continue to hold them as part of a diversified portfolio even after their target date is reached. How the manager plans to switch from capital appreciation to income generation is depicted in the fund’s glide path, available in the prospectus. Pay careful attention to that glide path as some funds may maintain a higher allocation to stocks in an effort to provide growth and income. Also watch out for fees, which can be upward of 1 percent.
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7 Ways to Retire Without Social Security originally appeared on usnews.com
