According to the Centers for Disease Control and Prevention, the average American’s life expectancy at age 65 in 2020 was 18.8 years. This means that people who retire at the conventional age need to have enough money saved up to cover their living expenses for at least another two decades.
The benefits of Social Security can be augmented with judicious investment. According to Christine Armstrong, managing director of asset management at Morgan Stanley Wealth Management, “retirees should explore boosting total portfolio yields by going outside of the bond market given the low starting points of traditional bond rates.”
In the current economy, the following seven investments can assist retirees in generating a respectable return without taking on excessive risk:
- Bond Ladders
- Municipal Bonds
- Real Estate Investment Trusts
- Dividend-paying stocks
- Covered calls
- Preferred stock.
- Annuities.
Bond Ladders
While bonds have not fared well this year due to rising interest rates and inflation, there is still no substitute for these income investing mainstays for seniors.
According to Matt Nadeau, a wealth advisor at Piershale Financial Group, using a bond ladder can help keep a bond portfolio theoretically safer and more flexible because rising rates and inflation have a greater impact on the pricing of long-term bonds than short-term issues.
Bond laddering allows you to purchase bonds with different maturities. You can either spend the principal as income as each bond matures or reinvest it in new securities.
If bond yields are rising when you go to reinvest them, you will benefit from higher rates; if yields are falling, you can choose a different bond term or investment, according to Nadeau.
In your bond ladder, you can think about employing various issuers. Series I savings bonds are currently a fantastic alternative, the man argues. “Your investment will be protected by this extremely low-risk bond that adjusts for inflation.” Just be mindful of the liquidity restrictions, as Series I bonds only allow for a $10,000 annual investment per individual.
For retirees, he advises being aware of what percentages of their money they must maintain liquid to cover living expenses and what portions they can tie up in less-liquid investments.
Municipal Bond
Compared to non-fixed-income investments, municipal bonds may not offer significant returns, but they do have one advantage that seniors can’t afford to overlook: tax-free income. When you invest in municipal securities, you are generally excluded from federal income tax as well as state income tax if you purchase bonds issued in your home state.
In retirement, it’s crucial to have a mix of taxable and tax-free income streams. The return on retirement assets can be greatly increased, and retirement expenditure demands can be supported by sourcing money from accounts in a tax-optimized manner, according to Armstrong.
Munis are a reduced-risk alternative for retirees who want to reduce their income taxes in retirement because they typically have lower default rates than corporate bonds.
According to Adam Lampe, CEO, and co-founder of Mint Wealth Management, “for higher-income people, municipal bonds look good right now as there was a huge sell-off in that market (that) generated opportunities for investors” to buy at a “sizable discount.”
Real Estate Investment Trusts
Real estate investment trusts, or REITs, make direct equity investments in a variety of real estate types or mortgages. Due to the fact that REITs are listed on stock exchanges, they offer a more liquid alternative to pure real estate.
Retirement clients’ need for income makes it crucial to manage retirement income risk, according to Armstrong. “Retirees need to consider how to give appropriate income while increasing and keeping up with inflation as well as how to withdraw in a tax-efficient method,” the article states.
The mandated dividend payout rate for REITs, which must pay out 90% of their taxable income to investors, is typically greater than the dividend yield on stocks. These investment vehicles “may be a strong total return investment for retirees as a piece of their portfolio,” according to Michele Lee Fine, CEO of Cornerstone Wealth Advisory, due to the combination of high dividends and the opportunity to develop properties or sell them and redeploy the money.
REITs can also shield retirees from the risk of inflation. The value of real estate increases along with inflation, according to Gene Goldman, CIO at Cetera Investment Management. “As a result, rentals go up, and income goes up.”
American Tower Corp. (ticker: AMT), which yields over 2 percent, and Crown Castle International Corp. (CCI), which has a yield of about 3.5 percent, are two of the major REITs with U.S. properties. This compares to the S&P 500’s current yield of 1.6 percent.
Because the income they generate is frequently taxed at a high rate, Jim Ward, senior vice president of advisory services for Retirement Planners of America, advises holding REITs in a tax-deferred account like an IRA.
Dividend-paying stocks
In the frequently turbulent world of equities, dividend-paying stocks might provide some steadiness. Compared to safer investments like certificates of deposit and U.S. Treasury notes, these payouts are frequently higher.
While you must still accept the risks involved with equities, dividend payers also have the opportunity to make money whether or not the stock price increases. These equities’ prospective price rises and income can assist you in staying ahead of inflation.
“Companies with a lengthy history of paying out dividends to investors each year through the harshest market cycles, crashes, and more, indicate a commitment to shareholders that can offer retirees with a stronger sense of peace of mind,” says Fine.
However, exercise caution while selecting dividend-paying stocks. According to Lampe, firms frequently borrow money to pay dividends when they offer high yields in an effort to entice investors. “Therefore, you need to be certain that they can deliver.”
To do this, look for S&P 500 companies known as “dividend aristocrats” that have increased their dividends for at least 25 years running. Procter & Gamble Co. (PG), a household name in consumer goods, has paid dividends continuously for more than 60 years.
Also, keep in mind that the idea of diversity still holds true: Lampe advises keeping any one stock to no more than 3% of your whole portfolio.
Covered Calls
Write covered calls on dividend-paying stocks, advises Laurie Itkin, a financial advisor and wealth manager at Coastwise Capital Group, as one approach to reducing risk with these investments.
A call is the right, but not the duty, to purchase or sell a stock at a particular price within a particular time period in the market for stock options. In order to get a premium payment, an investor who owns stock can sell (also known as “write”) a call option over the stock’s current price. It should be noted that if you write a covered call on shares you already own, you can be required to sell the stock if the call’s holder chooses to execute the option.
Investors should use a covered-call strategy when they are confident that the price of the stock they are holding won’t change significantly anytime soon.
According to Itkin, investors who use covered calls on dividend-paying equities can gain from the call option premium in addition to capital growth and dividend income. It is less hazardous to write covered puts on dividend-paying equities than it is to just buy dividend-paying stocks, she continues.
Although there is a “substantial risk” that the underlying shares will be called away in a volatile market, Goldman notes that certain options techniques can still generate handsome returns. The good news is that these tactics have more potential for income because of the significant market volatility.
Preferred Stock
Preferred stock is a mix of a stock and a bond that has the price volatility of stock but pays a coupon far higher than that of a government bond.
Preferred shareholders are paid before common stockholders but after bondholders in the order of precedence in the event of bankruptcy of a corporation. This added risk translates into greater rewards for preferred stockholders in comparison to bondholders as long as a company maintains a good financial position.
Preferred shares are “a favorable asset class for seniors seeking passive income,” according to Fine, due to the high yields they can provide for a retiree’s income stream. It’s crucial to include them in a diversified strategy to make sure that the portfolio is appropriate for the individual’s specific goals, objectives, risk tolerance, and time horizon.
Annuities
Investment agreements known as annuities are made between you and an insurance provider. They come in various shapes and sizes and typically contain a return that is guaranteed at a specific rate.
Fixed annuities ensure the invested principle, a specified interest rate, and predetermined payouts for the duration of the annuitant. It’s critical to be aware of the potentially large fees and commissions an annuity charges. Take the time to completely comprehend the product and carefully consider how an annuity will affect your tax liability because many annuities also have complicated features.
According to Ward, there are many factors to take into account while buying annuities, and depending on one’s specific situation, they might or might not be a wise investment. “The annuities can occasionally be much less appealing due to the lack of liquidity, the tax treatment of the income, and the corporate risk associated with them.” For assistance in deciding if annuities, and if so, which sorts may be a good option for you, he advises speaking with a licensed financial counselor.
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