Like most people, I am saving in a number of ways toward retirement, with one eye on what might be the best investments for retirement, when I get there. On the way, of course, there are 401 (k)’s, Roths, and various non-traditional routes available to most of us.
For example, target date mutual funds take the stress out of cutting risk toward retirement by naturally moving out of stocks the closer the investment gets to a set retirement target date: perhaps among the best investments now for the passive investor.
With treasury yields well below 2%, the stock market exhibiting renewed volatility, and returns on cash non-existent, investors are also turning to alternatives such as real estate, exchange traded funds, and energy commodities. And on the list of possible investments are also high yield corporate bonds and, perhaps, some emerging market sovereign bonds.
But, what about when you come to retirement itself – what options are there to produce the income needed throughout a, hopefully, long and healthy retirement?
What is the best investment for retirement for you will depend upon your individual situation, of course, but as income producing options any of the following ten could be used as stand-alone solutions or in combination. The point is there really is a wide range of choice when it comes to the best retirement investment to suit income need and attitude to risk.
These 10 best retirement investments are listed in no particular order.
Single Premium Immediate Annuity (SPIA)
This will provide you a guaranteed income, and can be structured so that the level of income grows with inflation or at a pre-set rate. Annuities give you certainty of income for the remainder of your life though once you’ve paid your money in you can’t withdraw any of that capital: it’s now the property of the life company that has issued the annuity. This means that there won’t be any money from the annuity for your loved ones when you die, and that can be a disadvantage too far for many.
When you buy a variable annuity, you are buying a portfolio of investments. You choose these, of course, but it does mean that the return achieved, and therefore any income, is dependent upon the performance of the portfolio. This is different to an SPIA where the income you receive is guaranteed by the insurance company.
Government or corporate debt instruments (bonds) will pay you interest on the amount you lend for the lifetime of the bond. When the maturity date is reached, your capital is returned to you. Though such bonds are often marketed as having your capital guaranteed, the guarantee is only as good as the financial condition of the underlying company or government.
The attraction of property is that it will give you a rental income – whether residential or commercial – and may increase in value. This last point, of course, used to be taken as a guarantee: the property market crash of 2006 – 8 dissolved this misconception. But being a landlord has drawbacks: there will be maintenance costs, for example, and it’s not unknown for tenants to mysteriously disappear.
Cash and cash lookalikes
This covers bank savings accounts, certificates of deposit, treasuries (bonds issued by the U.S. government), and money market accounts. Such investments are among the safest available, but consequently offer among the lowest returns. Your income might not keep pace with inflation, but your capital should be safe.
Retirement Income Funds
This type of fund allocates your cash across a range of stocks and bonds, and pays you a monthly income. One of the major attractions of this as a retirement income producer is that you can still access your principal – unlike an annuity. But it has to be remembered that any withdrawal will harm the income you get.
Closed End Funds
Producing income monthly, quarterly, or annually, these funds can cater for different investment objectives and risk profiles. They are run by professional managers who will seek to invest in instruments that pay dividends or interest, as well as utilizing covered call options and warrants. There are plenty of positives with these funds, though it has to be remembered that, however it’s packaged, risk is still risk.
Dividend Income Funds
A managed fund that aims to pay an income from the dividends it receives from a portfolio of dividend stocks. Though diversified across a number of stocks the diversification stops there. Investing solely in such a fund will give exposure only to the one asset class, and thus the risk profile could be pretty high.
Real Estate Investment Trusts (REITs)
REITs are funds that own real estate. They do everything you would do were you to own the property direct, and then pay income to you, the investor. There are rules stating how much of their profit they have to distribute to shareholders (90%), but, like dividend income funds, used without other investments they might be considered to overexpose to a single asset class.
Your Own Portfolio
Creating your own portfolio, or having a financial advisor do it for you, will give you the greatest flexibility of investment. It is possible to invest in a diversified portfolio of stocks and bonds, designed to give a good long term return. A disciplined strategy should allow you to benefit from set withdrawal rates allowing you to take between 4% and 7% each year.
There are now more options for an investor to create income in retirement than ever before. This offers you greater flexibility and choice of funds, style of investment, and asset. However, it has to be remembered that relying on a single source for your income may not be the best investment for retirement.
You should also remember that investment markets are a fluid and ever changing beast. What might be among the best investments now may prove to be among the worst performers in twenty or thirty years’ time.