Please note that this content is for informational/educational purposes only and you should not construe any such information as investment, financial, legal, tax, or other advice. This information is of a general nature and does not address the circumstances of any particular individual or entity and does not constitute professional and/or financial advice. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information provided. In general, we recommend meeting with a trusted financial professional to determine what investments and strategies are best for you and your goals.
Options to Consider After Your Regular Paycheck Stops
After 40 or more years in the workforce, the promised land of retirement is the light at the end of the tunnel for many Americans. We may envision it as a life stage with less stress and more time to do the things we actually enjoy. But life after 65 can be costly and could require a steady stream of income to help support the quality of life each individual desires.
Ideally, by retirement you have spent decades building a nest egg made up of your 401(k), individual retirement accounts (IRAs), individual investments and savings. However, there are also other investments you could make during retirement that may help supplement your income and ease your money worries. Below we’ll dive into some of the most common types but remember to always consult your financial advisor or CPA when planning for your investment needs.
Income Sources During Retirement
Pulling large sums of money from your savings account or taking significant distributions from your retirement accounts may not be the best way to ensure you’ll have a consistent stream of income in the years to come. Instead, consider systematic withdrawals. Systematic withdrawals basically mean calculating your needs for cash flow and only taking that amount out while the rest continues to compound – not too little, not too much, but just enough. Note that traditional retirement accounts, such as 401(k)s or IRAs, have required minimum distributions that you must take starting at age 72 and these increase after the first five or six years.
Immediate annuities are sold by insurance companies and, as the name implies, payments can start almost immediately and are available in monthly, quarterly or annual increments. The payment amount is generally fixed for the entirety of the contract, but variable and inflation-adjusted annuities are available as well. Annuities can be continuous for the entire lifespan of the annuitant or last for an agreed upon fixed term.
Retirees may choose this type of income stream because it’s immediate, predictable and not subject to market and interest rate swings. The cons are that payments typically don’t increase (and actually may decrease because of inflation) and your principal is locked up indefinitely. After the annuitant’s death, the insurance company keeps the principal and for those that pass earlier than expected, they may have not gotten their money’s worth. Note that certain provisions can be added to include a beneficiary that will receive payments for a certain period or a refund of principal should the annuitant pass early.
Bond laddering involves purchasing bonds from different sectors and asset classes with staggered maturity dates in the same portfolio. This strategy can help diversify and spread risk by hedging against moves in interest rates. Bonds typically pay out interest twice a year and investors could invest in enough bonds to ensure they receive a monthly payment. This strategy is often preferred by those looking for income rather than growth – a category many retirees may fall into.
Certificates of Deposit
For investors who are risk averse but want to earn more interest than what savings accounts and money markets are currently offering, certificates of deposit (CDs) could be reliable options to earn higher interest. Offered by most banks and credit unions, CDs pay monthly or quarterly locked premium interest rates (generally higher than those for savings accounts) in exchange for depositing lump sums for a predetermined period (typically 3, 6, 12 or 18 months). Similar to the bond ladder, it is also possible to construct a CD ladder with progressive maturity dates. While there isn’t significant growth opportunity with CDs, they are conservative and safe investments insured by the Federal Deposit Insurance Corporation (FDIC).
Dividend Paying Stocks
Some large, established corporations with predictable profits may pay regularly scheduled cash dividends to their shareholders. Dividends are not guaranteed though and companies have the right to reduce or even cease dividend payments. Because stocks are subject to market volatility and may decrease in value, shareholders must consider that they could lose their investments. For retirees looking to gain income from dividends, corporations with a solid history of dividend payments could be prioritized. Modiv pays monthly dividends.
Direct Real Estate Investments
Monthly checks from tenants may be another good way to supplement retirement income and help cover expenses. Historically, real estate has held its value or appreciated, with a few exceptions, so it may help preserve your capital invested should you choose to sell your property. However, investment properties can become vacant, disrupting your stream of income, and may need maintenance and repairs which can be costly. While you, as the owner, are responsible for property taxes, there are also tax benefits like deducting the property’s depreciation which can help decrease taxes on the rental income you receive.
Source: St. Louis Fed
For retirees interested in real estate income but not the hands-on work that comes with it, investments in REITs might fit the bill. A real estate investment trust (REIT) is most commonly defined as a “company that owns, operates or finances income-producing real estate” and is required to pay out 90% of its taxable income to shareholders. REITs allow individuals to invest in commercial real estate assets in a manner similar to what they are used to with other investments, like purchasing individual company shares or by participating in mutual or exchange traded funds. Keep in mind that Investing in REITs, is not immune to risk, including illiquidity and potential loss of capital.
Unlike corporations offering dividend paying stocks, REITs are required by law to pay dividends to shareholders if the REIT has taxable income. With dividend distributions of a typical corporation’s shares, investors are essentially taxed twice – at the corporate level and individual earnings level. Because of their special tax structure, REITs allow investors to keep a larger percentage of their returns. The Tax Cuts and Jobs Act of 2017 has also rewarded REIT investors with additional benefits, namely that the income received from REIT dividends can be considered qualified business income and investors can receive up to a 20% deduction. Be sure to discuss the potential tax benefits of REIT ownership with your CPA or tax advisor, as they may be able to provide additional insight and guidance. Modiv is a single-tenant net lease REIT that pays monthly dividends.
To Wrap It Up
Just as those saving for retirement are encouraged to diversify their investments, those in retirement are encouraged to consider multiple sources of income. For many retirees, income may come from multiple sources, including Social Security, 401(k)s, IRAs and other income-producing investments, or combinations of all of these methods.
A steady, predictable income to fund retirement needs is possible with a little planning. With each of the investment vehicles outlined above, there is risk involved and they may not be suitable for all investors. Consult with a financial professional to better understand the risks and rewards of each as you develop a plan that can help you keep up with the lifestyle you choose in retirement.
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The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.