The biggest concern retirement clients have is a reliable income in retirement. When you've worked for decades and received a consistent income from a job or business, it's understandable that taking that away would be a major shift in your lifestyle!
While everyone wants to increase their wealth and grow their savings, typically income comes first on the to do list for retirement clients. Finding a way to produce at least enough monthly income to cover all the monthly expenses is an absolute necessity. The question comes down to, what's the best way to do that?
Retirees are all aware of the income streams they will receive from Social Security and a pension if they are fortunate enough to receive one in retirement. The real question comes down to, how can I create more income with my retirement savings? Whether its a 401k, IRA, brokerage account, or personal savings in the bank, we can utilize these funds to invest in a manner focused on income. Here's the main 4 ways we see people invest for income in retirement.
1.Annuities
Annuities are insurance products that provide a guaranteed income stream, making them a popular choice for retirees seeking financial stability. You can purchase an annuity with a lump sum or through a series of payments, and in return, the insurance company provides regular income payments for a specified period or for the rest of your life.
These are a great solution to creating essentially a secondary pension for clients in retirement. Regardless of the volatility in the economy and the stock market, they can count on consistent monthly income. Some of the downfalls with annuities is they tend to have high fees if you access more than 10% of the account balance each year. That makes these income vehicles "illiquid" or harder to cash out if you needed them. This concern is why we always recommend clients have a sizable amount of accessible cash or short term investments so the annuity can strictly be used for income purposes in retirement.
2. Dividends
Dividends are payments made by a corporation to its shareholders, typically on a quarterly basis. This is your share in the profits that the company decides to distribute to you as a partial owner. By investing in a diverse portfolio of stable, dividend-paying companies, you can generate a reliable income without needing to sell your investments. Dividends are not guaranteed and will fluctuate, but if you invest in a group of profitable, financial strong companies, you can typically receive a consistent income each year from these dividends. You also have the upside potential that the business continues to grow, and thus the stock price should increase. As a con, the stock can also go down in value, or potentially stop paying a dividend if the company financials are harmed.
3. Interest
Interest payments are received from investing in debt securities. Whether it is something very short term like a money market account, or a longer term investment in a bond, interest payments can be received. There's also various ways to finance and lend to businesses directly called private credit. These investments can all produce monthly income for the client to supplement their retirement income. It's important to understand what debt you are investing in as these have risk, but if done correctly, retirees can receive a consistent income stream while protecting their initial capital. The downside is these investments won't increase in value overtime. The goal is strictly to create income as opposed to growing your savings like some other vehicles.
4. Real Estate
Real estate is a tried and true wealth builder that can also produce income for investors. Whether its residential, commercial, or investments in a REIT which is a publicly traded stock that produces income to shareholders without any work required on the day to day to operate the business. Rental income can be a great way to receive an additional income stream in retirement. The question comes down to if the client wants to operate like a business and be involved or to be completely passive. There's pros and cons to each option based on the level of involvement, asset type, and risk, but across the board real estate can be a way to receive tax benefits, asset appreciation, and an income stream in retirement.
Retirement doesn’t have to mean the end of earning potential. By exploring part-time work, investing in dividend-paying stocks, real estate, annuities, or interest producing investments, you can create multiple streams of income that suit your lifestyle and financial goals. The key is to find a balance that allows you to enjoy your retirement years while maintaining financial security. Each option has its pros and cons, so it’s important to assess your personal situation and consult with a financial advisor to create a strategy that works best for you.
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