HEALTH ADVICE
Retirement Planning is not an easy job at all. Rising inflation numbers, slowing economy growth and too many financial products do not make life easy for any individual planning for retirement. Mis-selling of financial products by banks and other financial institutions has only doubled the customer’s confusion. Retirement has two phases – Accumulation and Distribution. Accumulation phase is the period where you accumulate the amount required for your needs post retirement. Distribution phase is where the accumulated corpus is distributed well to suffice the post retirement needs. Let us look into financial products for investment to build a strong portfolio for retirement:
- Construct a Total Return Portfolio
One common way to create retirement income is to construct your own portfolio of stock and bond index funds (or work with a financial advisor who does this). The portfolio is designed to achieve a respectable long term rate of return, and along the way you follow a prescribed set of withdrawal rate rules that will typically allow you to take out 4-7% a year, and in some years, increase your withdrawal for inflation.
The concept behind “total return” is that you are targeting a ten to twenty year average annual return that meets or exceeds your withdrawal rate. Although you are targeting a long term average, in any one year your returns will deviate from that average quite a bit. To follow this type of investment approach you must maintain a diversified allocation regardless of the year-to-year ups and downs of the portfolio.
- Use Retirement Income Funds
Retirement income funds are a specialized type of mutual fund. They automatically allocate your money across a diversified portfolio of stocks and bonds, often by owning a selection of other mutual funds. The investments are managed with the goal of producing monthly income which is distributed to you. These funds are constructed to provide an all-in-one package that is designed to accomplish a particular objective.
- Immediate Annuities
All annuities are really a form of insurance rather than an investment. I am including them on the best retirement investment list because their purpose is to produce income and that is what you need in retirement.
There are fixed immediate annuities as well as variable immediate annuities. Some offer income that will increase with inflation, although that means you’ll start out receiving a lower monthly amount.
You can also choose the term of the annuity, such as a ten year payout, a joint life payout (appropriate if you are married and want income for either of you that may be long-lived) or a single life payout.
- Buy Bonds
When you buy a bond you loan your money to either the government, a corporation, or a municipality. The borrower agrees to pay you interest for a set amount of time and when the bond matures your principal is returned to you. The interest income, or yield, you receive from a bond (or from a bond fund) can be a steady source of retirement income.
Buy bonds for the income they produce and/or for the guaranteed principal you will receive when they mature – don’t buy them expecting high returns or expecting to make a gain on capital appreciation.
- Rental Real Estate
Rental property can provide a stable source of income, but there will be maintenance requirements and when you own real estate you will inevitably incur unanticipated expenses. Before you buy rental property you need to calculate all the potential expenses you may incur over the expected time frame you think you will own the property. You also need to factor in vacancy rates – no property will be rented 100% of the time.
- Variable Annuity with a Lifetime Income Rider
A variable annuity is a completely different type of investment than an immediate annuity. In a variable annuity your money goes into a portfolio of investments that you choose. You participate in the gains and losses in those investments, but for an additional fee you can add guarantees, called riders. Think of a rider like an umbrella – you may not need it but it is there to protect you in a worst-case scenario.
- Keep Some Safe Investments
You always want to keep a portion of your retirement investments in safe alternatives. The primary goal of any safe investment is to protect what you have rather than generate a high level of current income.
I recommend all retirees have some type of reserve account (an emergency fund). This account should not be included as an asset available to produce retirement income. It is there as a safety net; something to turn to for unforeseen expenses that may come up in retirement.
In addition, if you are not sure what to do with your money, park it in a safe investment while you take the time to make an educated decision. Too many people rush to put their money into an investment because they feel like it should not be sitting in the bank for too long. They end up making a hurried decision. This is not a good idea.
- Income Producing Closed-End Funds
The majority of closed end funds are designed to produce monthly or quarterly income. This income can come from interest, dividends, covered calls, or in some cases from a return of principal. Each fund has its own objective; some own stocks, others own bonds, some write covered calls to generate income, others use something called a dividend capture strategy. Be sure to do your research before buying.
Experienced investors may find closed end funds to be an appropriate investment for a portion of their retirement money. Less experienced investors ought to avoid them or own them by using a portfolio manager who specializes in closed end funds.
- Dividends and Dividend Income Funds
Instead of buying individual stocks that pay dividends, you can choose a dividend income fund, which will own and manage dividend paying stocks for you. Dividends can provide a steady source of retirement income that may rise each year if companies increase their dividend payouts – but in bad times, dividends can also be reduced, or stopped all together.
- Real Estate Investment Trusts (REITs)
A real estate investment trust, or REIT, is like a mutual fund that owns real estate. A team of professionals manage the property, collect rent, pay expenses, collect a management fee for doing so, and distribute the remaining income to you, the investor.
REITs may specialize in a certain type of property, such as apartment buildings, office buildings, or hotels/motels. There are non-publicly traded REITs, typically sold by a broker or registered representative who receives a commission, as well as publicly traded REITs which trade on a stock exchange and can be bought by anyone with a brokerage account.
When used as part of a diversified portfolio, REITs can be an appropriate retirement investment. Due to the tax characteristics of the income REITs generate, it may be best to hold this type of investment inside a tax deferred retirement account such as an IRA.