Monday, January 26, 2015

Creating Steady Sources of Income in Retirement

Over the past year, I realized one of the deficiencies of my retirement finances: insufficient steady income streams.   Our retirement income is primarily dependent on the gains of our investments. While investment gain strategy works well when investment values rise, it under performs during market corrections and bear markets, as I learned and experienced in 2008.

Here are the four investments elements I am working on to create steady sources on income:

  • Fixed income -  For us, these are mainly CDs.  Over the past year, we bought several 5-10 year CDs that pay 2-3% a year.  (Alas, gone are the days of earning 5% in a money market account.)  We purchased the CDs through a brokerage, and therefore, can sell them before maturity, if we need the funds.  I am also considering investing in closed end municipal bond funds, which pay about 5% yields.  I am targeting to get 25% of our retirement income through fixed income.

  • Dividend income -  I will be increasing the number of stocks that pay dividends in our investment portfolio.   First, we have invested in a fund that focuses on dividend income and growth.  We have used this fund from 2009 to 2011 and since 2012.  I have been happy with both the dividend yield (~3.5%) and the investment gains over that time.  In addition, I plan to add dividend paying stocks on my own, using the Dividend Aristocrats and Dividend Achievers lists as a starting point.   Finally, I plan to keep, instead of sell, the remaining stock I have of the company from which I retired since it has a 3% dividend.  I am targeting to generate 25% of our retirement income through dividends.

  • Rental Income - In 2013 I became a landlord when I inherited part ownership of a commercial rental property.  The good news was that the mortgage was paid off and the property is positive cash flow.   It is also handled by a property management company, which reduces direct involvement by the owners.  Although there is consistent income, the annual net rental income varies due to vacancies and economic conditions.  I would like the rental income to cover 25% of our retirement income.   However, once this property is sold, I don't know if we will purchase another property to replace it.

  • Annuity Income -   I've looked at purchasing a lifetime annuity through an insurance company, but haven't been able to rationalize the cost.  I am interested in an immediate annuity in about 20 years, but most agents aren't interested in selling me a policy in 20 years :-)  At this point, our most likely source of lifetime annuity income will be Social Security, for which we won't be eligible to receive for about a decade.  I expect that Social Security will cover about 25% of our retirement income. 

  • For now, we will consider gains in our investments as a bonus, but also target investment gains to cover 25% of our annual retirement income.  This will provide a cushion if the four income categories fall short of their 25% target.

    I'll be working on implementing this retirement income strategy over the next few years.

    For more on Strategies and Plans, check Mondays for a other segments.

    This is not financial advice. Please consult a professional advisor.

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