Once you retire, you may need to generate ongoing retirement income to support your lifestyle. Some retirees assume their income options in retirement are limited to income-generating investments, but we believe this view is misguided. There are many ways to use your retirement savings to generate income, and the one that’s right for you likely depends on your personal situation and investment strategy.
Before you develop your retirement plan, you may want to familiarize yourself with some available options to generate retirement income as a retiree.
Investors often believe they need to generate income by investing in income-producing assets—or investments that pay out income to the security holder. While these options may limit investing flexibility and options, here are some common assets investors may limit themselves to when anticipating the need for ongoing retirement income.
Generating retirement income from high-dividend stocks may seem like a plausible strategy—you can get equity exposure and receive ongoing dividend income. However, investing too heavily in these stocks can leave you over-exposed to a small number of sectors or areas of the broader stock market. Even if your returns are favorable, being over-concentrated in a limited area of the market could leave you vulnerable to trends and changes within that area. This over-concentration could even negate the portfolio diversification necessary to reach your long-term investing goals.
Further, in market downturns, some companies cut or stop paying dividends altogether. If you rely on dividends alone for your income strategy, you could potentially find yourself short of cash if those companies or sectors go through tough times. While dividends may be one source of retirement income, relying on high-dividend stocks for retirement income might not be the wisest course.
If you have a shorter investment time horizon or require lower short-term market volatility than stocks, bonds may be a viable investment option as most provide consistent and relatively predictable coupon payments. If you require longer-term portfolio growth, bonds may not be the best fit your retirement savings. Stocks produce much higher returns over the long term (think 20-30 years). So whether bonds are right for you depends largely on your long-term goals and financial situation.
Also, keep in mind that bonds come with their own set of risks. Here are a couple of examples of potential bond risks:
Additionally, individual bonds can sometimes be illiquid (compared to stocks). Bond tranches can be so large they may trade for tens of thousands of dollars. If you hold a relatively small portfolio, these types of bonds can make it difficult to diversify your portfolio, which may even put you at greater risk of missing your longer-term investing goals.
In addition to stocks and bonds, some investors look to other potential sources of retirement income.
Many retirees are attracted to the income features of annuities. Some annuities may even provide lifetime income, but you should consider potential limitations of these products before purchasing.
First, most annuities aren’t typical investments. They are more like insurance products. And their limitations emphasize the difference between the two—you may not be able to pass down annuity benefits in the same way you can pass on an investment as a gift or legacy. You may be able to extend annuity benefits to a beneficiary within limits, but that may come at a high cost.
The various benefits of annuities can also make these products expensive and illiquid. Here are a couple important questions to ask when considering annuities:
Some investors also look to generate income from investing in real estate, usually broken down into two categories: direct and indirect investments.
If you require longer-term growth and income during retirement, a personalized investment portfolio capable of achieving growth while providing the necessary cash flow—what we call homegrown dividends—might be an appropriate solution. Generating homegrown dividends involves selectively and incrementally selling stocks for cash flow. While investors can incur trading commissions through this strategy, it is a flexible and potentially tax-efficient way to generate cash flow in a taxable account, especially for investors with larger portfolios.
A second set of eyes on your financial future and income needs is a good idea. Contact Fisher Investments to speak with one of our qualified professionals or download one of our educational guides to determine which sources of retirement income can help you meet your retirement goals and objectives.