Retirement means a lot of things to people, including lots of leisure time, no regular work hours and no paycheck. Yet bills must be paid and a lifestyle maintained. Retirement can last decades. Ensuring they have enough money gives individuals a huge headache and is a full-time business for financial advisers and consultants. There are no cookie-cutter answers to guaranteeing income for life.
Sources of Retirement Income
Most retirees receive Social Security. The long-term availability of Social Security is a valid question and those in their 50s and younger need to plan for a retirement without Social Security benefits – just in case. Millions of older Americans count on Social Security. Many retirees also receive pensions. Unfortunately, fewer workers are lucky enough to collect pensions each year. A lot of companies do not offer pensions; many more suspended or canceled them, went bankrupt or closed their doors. Pensions from these providers dwindled or disappeared.
Additional Income Streams
Many retirees rely mainly on their own savings for a portion of their retirement income. This includes traditional and Roth IRAs, qualified retirement plans such as 401ks, 403bs and SIMPLE IRAs, and taxable investment accounts. Additional income sources may include collectibles, antiques and property. Countless seniors sell their primary residence and downsize, often investing some of the proceeds for additional income.
No. 1: Short-Term Investments for Seniors
Retirees may need cash at any time for expenses such as a new car, home repairs, vacations or medical care. Safe places to store cash for short-term needs are money market accounts, certificates of deposit and Treasury bills. These safe investments provide a small return in the form of interest and the return of principal. CDs and Treasury instruments should be purchased so that maturities stagger, forming a bond ladder so that every few months one security matures. This provides cash if needed or opportunities for reinvestment. Bond ladders take advantage of rising interest rates, locking in rates for longer periods of time while short maturities are purchased during low interest rate environments.
Nos. 2 and 3: Long-Term Corporate, Municipal and Inflation-Protected Bonds
A large portion of a retiree’s assets should be invested in a portfolio of bonds for income. Investment-grade corporate bonds in qualified accounts and investment-grade municipal bonds in taxable accounts provide income and return of principal upon maturity. Portfolios should also include inflation-protected bonds such as TIPS – Treasury Inflation-Protected Securities. These are ideal investments for retirees because they offer income, protection against inflation and return of capital at maturity.
No. 4: Fight Inflation With Dividend Stocks
Conservative investors consider return of capital their highest priority; they do not want to lose money. Retirement, however, can last decades. A sufficient income this year will not stretch far enough to pay the bills 10, 20 or more years in the future. A small percentage of every retiree’s investment account needs to be in investments that not only generate income but will also grow. A prudent inflation-fighting investment is dividend stocks. Retirees should consider large-cap stocks, index funds or equity income stock funds.
No. 5: Fixed Annuities
There are two kinds of annuities: fixed and variable. Fixed annuities provide a guaranteed income. They are a low-risk investment offering minimal return. The income from variable annuities usually changes because it is based on the performance of the mutual funds in which annuity funds are invested. Variable annuities are high-risk investments that may provide a higher return. Annuities are long-term investments; most have penalties for early withdrawal or transfers. Annuities can be expensive investments. Retirees should look for fixed annuities with low fees when seeking an income source promising a regular fixed payment over a number of years.
Meryl Baer worked at a financial firm for 15 years, researching investments and writing newsletters and marketing materials. She also worked at two business schools as an English/business writing instructor, department head and placement director. Baer holds a master's degree in American studies from Pennsylvania State University and a master's degree in business administration from Robert Morris University.