Retirement Income Ideas for Your Financial and Lifestyle Choices

Investing in Bonds and Fixed Income

Most bonds offer fixed coupon rates, which can give the impression that bonds are among the safest investments available. However, bonds still carry several types of risk:

• Interest rate risk. Since interest rates and bond prices move inversely, rising interest rates may cause your fixed income holdings to lose value. If you sell before they mature, you may end up realizing significant losses.
• Liquidity risk. Some bonds aren’t very liquid—you may find them difficult to buy or sell. You could purchase a thinly traded bond at a premium, or sell a thinly traded bond at a discount—both potentially unfavorable scenarios. In the worst-case scenario, you may not be able to find a buyer for your bonds when you need to sell for emergency cash.
• Reinvestment risk. If you own high-coupon callable bonds from a solvent issuer and plan to hold them until maturity, there is the risk the issuer may redeem them early, in which case you could lose your future coupon payments. Many companies choose to redeem callable bonds when interest rates are falling, meaning you may not be able to find a bond with a similar coupon payment to reinvest your money in. You may have to settle for a lower coupon payment—potentially affecting your income needs—or purchase a more expensive bond to keep your income stream intact.
• Credit/Default risk. Default risk is one determinant of a bond’s interest rate. When you purchase a bond, you are assuming a relative degree of risk, depending on the creditworthiness of the bond issuer. Just as banks charge higher loan rates to riskier borrowers, higher bond interest rates can also reflect a higher credit risk from a bond issuer. If a bond issuer can’t live up to its end of the bargain and defaults, you can lose your principal and future interest payments.

In addition to these risks, bonds generally underperform stocks over the long term, which could hinder reaching your retirement goals. However, bonds can still play a role in your retirement income plan, but we generally recommend using them as a buffer against the stock market’s volatility instead of as your primary income source.

A Possible Solution for Generating Retirement Income and Growth

If you are too focused on dividend-paying stocks or bonds, you may be overlooking another retirement income idea: homegrown dividends. A homegrown dividend approach involves holding a diversified and growth-driven portfolio of stocks which can be selectively sold to generate cash flow.

Because your cash flow is based on a stock’s growth potential, you can choose which stocks to keep and sell. You don’t have to hold on to a poorly performing stock just because it pays dividends.

Creating cash flow this way may also be more tax-efficient than dividend or bond coupon payments. When you sell a stock, it is taxed as a capital gain (or reportable as a capital loss), while dividend and bond income may be taxed at a higher rate as regular income. Please consult your tax advisor. 

Investing in Annuities

Investors who prefer less risky investments may seek out annuities for their promises of guaranteed lifetime income—especially after retirement when investors’ income streams generally shrink. But annuities come with their share of tradeoffs:

• Surrender charges. If you have a significant unexpected expense in retirement and need to pull money out of an annuity earlier in a higher amount than specified in your annuity contract, you may be subject to incredibly high surrender charges depending on the contract.
• They don’t take inflation into account. Manyannuities lack the ability to combat inflation, which has averaged 2.9% year over year. Some annuities do offer inflation protection features—for an additional fee.
• Erosion of invested capital. The tradeoff between exposure to inflation and the cumulative effect of ongoing fees can erode the value of your invested capital.

If your retirement plan requires equity-like growth to achieve your investment objectives, income from deferred or immediate annuities may be insufficient. They can be expensive and restrictive.

Certificates of Deposit (CD)

A CD is a promissory note issued by a bank. It entitles the CD owner to predictable interest for a pre-determined time period—anywhere from one month to five years. The downside to a CD’s predictable returns is the loss of liquidity.

Higher interest rates are generally associated with longer terms and also higher penalties if you make withdrawals before the CD matures. If you need money for any unforeseen circumstances, you may have to pay a significant penalty.

While CDs may give you slightly better returns than the average savings account, they may not be a reliable longer-term growth strategy. Inflation could significantly impact the investment’s purchasing power. For example, a $100,000 CD paying 3% interest annually will generate $3,000 in income. However, the long-term annual average of inflation is near 3%*. So while the CD paid $3,000, the purchasing power of the $100,000 invested in the CD decreased by $3,000, thereby generating no net real return. Inflation may degrade returns over the CD’s investment time horizon.

Social Security Benefits

Most retirees should consider Social Security to be a supplement to other retirement income. For many, Social Security won’t cover all expenses in retirement. If you plan to rely on Social Security benefits to meet your expenses, you may want to continue working until maximum benefits are available, which is generally at age 70.

Careful Planning and Healthy Diversification

Many of the investments mentioned in this article can be good choices if they are part of a well-diversified portfolio. Selecting the right investments to make money in retirement takes skill. To find out more about Fisher Investments’ unique portfolio construction strategy, familiarize yourself with our top-down investing approach.

Global Financial Data, Inc (GFD), as of 25/05/2022. Average rate of return from 01/01/1926 through 31/12/2021. Equity return based on GFD’s World Return Index in GBP. The World Return Index is based upon GFD calculations of total returns before 1970. These are estimates by GFD to calculate the values of the World Index before 1970 and are not official values. GFD used specified weightings to calculate total returns for the World Index through 1969 and official daily data from 1970 on. Fixed Income return based on GFD’s Global USD Total Return Government Bond Index and converted to GBP.

Source: FactSet, as of 23/08/2022. Based on US BLS Consumer Price Index from 31/12/1925 to 31/12/2021.Average inflation is 2.9%