How to Invest for Retirement Income
How to Invest for Retirement Income
On the 44th episode of the Retirement Explained show, I’m talking about how you should approach investing your savings with an eye on turning it into a reliable income stream so you can have the option of not working.
Investing with creating an income stream in mind is a bit more nuanced than the strategy you might have taken when it came to accumulating your assets and saving your money throughout your working years and on today's episode, I'm going to share and discuss with you the best vehicles for you to do so.
Retirement Income Investment Vehicle #1: Bonds
Bonds are an important vehicle to consider when looking to create an income stream with your savings because they pay high interest rates and are typically more stable than stocks.
When you buy a bond, you’re effectively lending money to whoever issued the bond (whether it be a Government or a corporation) and they’re going to pay you back…with interest.
You can use the interest as an income source along the way and you’ll get your money back when the term of the bond ends. Bonds typically have a time frame associated with them, like your mortgage, so you might have lent money to the Federal Government for 10 years and they might be paying you 3% interest for the privilege, for instance.
Retirement Income Investment Vehicle #2: Dividend Stocks
Dividend stocks are similar to bonds in that they pay a dividend that you can use as income. Dividends and interest rates are similar except that dividends aren’t required and the company can choose to stop paying the dividend at any time whereas interest rates with bonds are mandatory.
Stocks also fluctuate much more than bonds because, unlike bonds, there isn’t an agreed-upon ending. With a bond, the issuer is agreeing to give you your money back at the end of the term…with a stock there is no such agreement and, as such, the price can fluctuate wildly.
Retirement Income Investment Vehicle #3: Preferred Stocks
Preferred stocks are basically dividend stocks with fewer fluctuations but higher dividends than regular stock. That might sound amazing, like you’re able to have your cake and eat it too, but preferred stocks are less common than regular stock and they’re harder to find.
Retirement Income Investment Vehicle #4: Real Estate
Real estate can offer you an intriguing vehicle to produce an income stream because, typically, when you’re a real estate investor, you’re renting out the property to someone and the rental income can serve as an income source.
There are two kinds of real estate, commercial and residential. Commercial real estate can be invested in vis-a-vis a real estate fund and residential real estate can be invested in through purchasing a property somewhere around town and you finding a tenant to occupy your property.
Real estate has some considerations you should take, for instance, while the commercial real estate funds are traded like stocks and are thus very liquid, residential real estate is not and if you need to get your money out of the property it might take some time.
Retirement Income Investment Vehicle #5: Balanced/Asset Allocation Funds
Balanced/Asset Allocation funds are investment funds that are a mixture of stocks and bonds. Typically when a financial advisor puts together a portfolio for you, they’re creating a mixture of investments that is balanced and appropriate for your risk tolerance, where you are in your life, and what you’re trying to achieve.
A balanced fund does something similar and because it’s made of a mixture of stocks and bonds, it can offer you more stability than stocks and a greater return than bonds while producing an income stream through the dividends and interest rates.
Retirement Income Investment Vehicle #6: Annuities
Annuities are like bonds except you’re lending your money to an insurance company and they’re contractually obligated to give you your money back over a period of a time. It’s like a pension you can purchase for yourself.
The income you can get from an annuity is typically higher than that of a bond, but in exchange for a greater stream of income you’re giving up liquidity. Annuities are notoriously difficult to get your money out of, unlike a stock or bond.
Annuities aren’t a bad thing, I think they get a bad rap; they’re a tool, like anything else, and they can come in really handy if used right and they can hurt you if they’re used incorrectly.