Are you worried about your retirement income? Do you have a plan for any of your retirement income that would in addition to Social Security? Well, there are some tips that one can use to generate a steady stream of income in retirement. For a fictional couple who worked very hard their entire careers retiring in their late 60’s and when they retired they were each earning low six-figure salaries. Our imaginary couple participated in their respective company’s 401(k) plans, and they also contributed to their IRA’s. Between their company plans and their IRA, they currently have a $700,000 nest egg to rely on. But will that be enough and will it provide them the income they need to retire in a style that they have dreamed of their entire lives? Well, to start off this couple can expect about $50,000 annually in Social Security payments so that is the foundation we will build upon. And with interest rates at historic lows you most likely are asking where should I go to find safe and reliable income streams. Well, the following is a template that could be used to produce a safe and reliable source of income throughout your retirement years. And as interest rates really can only go up that is a concern investing now but there are ways to mitigate this risk.
First there are annuities that can be purchased to provide a safe and steady income stream for a set amount of time or the rest of your lives. Now with over 1,600 different annuities and a large selection of annuity types to choose from it is no wonder many people avoid these financial instruments. As a licensed life insurance agent, I can tell you Annuities can be very complicated and scary even to those of us who understand them and even sell them. The first thing you need to do is find someone who can explain the ins and outs of the annuity to you in a way that makes you feel comfortable in buying the product. A trusted life insurance agent or financial planner can come in handy in these situations so do not be afraid to ask for help as these are some of the most sophisticated financial instruments people can buy. And annuities have gotten a bad reputation due to the high fees associated with them. And this is true to a degree as variable annuities can charge you up to 2% or more for annual management fees. There is also the commission paid to the agent who sold you the annuity that can run as high as 10%. This is where a fee-only financial planner can be of assistance as they can recommend an annuity from a brokerage house such as Vanguard, which will charge no commissions. And finally there are the early surrender charges that can last seven to ten years and be as high as 7% of the value of the annuity for early withdrawals.
Let’s say our imaginary couple purchased an annuity for $200,000 when they were 60 for the husband. They could expect about $1,000 a month in income for the remainder of their lives or $12,000 a year. The same couple could place $500,000 in an annuity and expect to receive about $30,000 annually in payments. As you can see, these are not bad investments if you are worried about outliving your money as these annuities provide protection against just that. But again I want to stress that there are numerous types of annuities and several things that must be considered prior to purchasing one so always do your due diligence in regards to these powerful and complicated financial instruments.
The second way to generate a steady and safe income stream is to look into bond mutual funds or exchange traded funds. Now here I would advocate for an indexed fund to reduce the costs associated with the funds ownership but that can have its drawbacks. Bonds can be a tricky investment in the current interest rate environment as we are experiencing some of the lowest rates in most people’s lives. While an index fund can spread the risk over a broad array of bonds they are limited when rates do rise and will in return suffer in their returns. Here an active managed fund can be worth the extra in management fees as managers can purchase shorter duration bonds that do not feel the effects as much as long-term bonds and can be re-invested faster into the higher paying bonds. By being able to buy and sell outside of the index the fund’s managers can help produce higher yields than a passively managed index fund. To find some of the higher yielding funds you can use sites such as the finance section on www.yahoo.com or www.morningstar.com to filter the funds and find the one that best fits your needs.
A third technique that is not as popular right now but can be structured to take advantage of rising rates is a laddering certificate of deposits at different banks. The key to this technique is to but five different CD’s that mature at different times. The first is a one-year CD the second is a two-year CD and so on until you reach a five-year CD. Then as they CD’s mature you reinvest the principal into a new five-year CD at what we hope will be higher rates. This strategy allows you to invest in CD’s insured up to $250,000 by the FDIC and take advantage of rising interest rates. True rates right now are not all that enticing but they will go up in the future and this is a strategy that will enable anyone to invest in safe CD’s and take advantage of any interest rate movements.
Finally, there are blue chip stocks that pay dividends. These are similar to bonds in the fact that as interest rates rise the technical value of the dividend paying stock will go down some. But they will bounce back relatively quickly if history has been any indication. If you take the stock prices appreciation and the dividend into account these stocks that do pay a dividend return between 9% and 11% annually compared to stocks that do not pay a dividend what only return about 8% annually. And some stocks like Coca-Cola have paid and in most instances increased their dividend since the 1880’s. Research the stocks and see which ones have a history similar to Cokes to invest in some high-quality companies. If a company can pay a dividend through two World Wars, the Great Depression and the Great Recession, I am reasonably confident they will pay a dividend through your retirement.
While this is not guaranteed to make your retirement one of the absolute riches it will increase your cash flow from year to year. If our couple did buy a $200,000 annuity that paid $12,000 annually that would leave $500,000 to invest in CD’s, bonds and dividend stocks. If that combination produced a 3% return, you would add $15,000 to your cash flow. That takes their retirement income up towards $77,000 on an annual basis. Not too bad and it may allow for some additional fun in your golden years.
Shop around for the best things to invest in and be smart, always do your homework prior to investing or buying any financial product. Retirement can be scary, but there is no reason you cannot be prepared and position yourself in the best possible place to maximize your retirement income.
For more information, please feel free to contact me.
