5 investment options to help generate retirement income

Financial Planning / Planning for Retirement

The average life expectancy in the U.S. sits at roughly 78 years.1 And that’s just the average.

About one out of every three 65-year-olds today will live past age 90, and about one out of seven will live past age 95. If you plan on retiring in your 60s, as many people do, you still need to make your retirement savings last almost 30 years. That’s a lot of pressure to place on a traditional retirement account.

Social Security retirement benefits will replace only about 40 percent of your pre-retirement earnings. You'll need to supplement your benefits with a pension, savings or investments. Many retirees seek part-time employment for all kinds of reasons, including the financial and mental benefits of staying active and involved in their communities. Still, it’s important to have a plan in place for generating additional income during your retirement.

Here are five common retirement investment options to help you generate income.

1. Annuities

An annuity is a contract between you and an insurance company where you pay a sum of money and that money is dispersed back to you through regular payments. Annuities can help you set up a guaranteed income stream for a certain period of time or for the rest of your life.

You pay a specific amount to an insurance company with the understanding that the money will be dispersed to you at a later date. While the money is with the insurance company, it has the potential to accrue on a tax-deferred basis. When you start taking disbursements, you can choose a consistent income stream or account for rises in the cost of living to match inflation. You can also choose to have this income be paid through your own lifespan or through the lifespan of you and another person (e.g., your spouse).

Many annuities have liquidity features that state you or your heirs will receive the full amount of the investment back.

Annuities can provide:

  • Steady, predictable source of income in retirement, regardless of market fluctuations
  • Tax-deferred growth and tax-advantaged income
  • Flexibility both in how you save for and receive money in retirement
  • Beneficiaries may be able to receive payments after you die

Challenges of annuities:

  • Guarantees are subject to the claims paying abilities of the underlying insurance company
  • Liquidity may be limited
  • Withdrawals from annuities prior to age 59 ½ may be subject to a 10 percent tax penalty
  • Always look for highly-rated insurance companies when seeking guarantees

2. Retirement income funds (RIFs)

Retirement income funds (RIFs) are a type of actively managed mutual fund. RIFs automatically invest your money in a diversified portfolio — typically, large and mid-cap stocks and bonds — and periodically rebalance these assets to keep your investment aligned with your goals.

Some RIFs pay out regular income distributions, whether monthly or quarterly. The main objective of a retirement income fund is to generate a predictable stream of income.

RIFs can provide:

  • Conservative, moderate growth potential
  • Active management by a professional
  • Option to access your money at any time

Challenges of RIFs:

  • You can expect your income and the value of your assets to fluctuate with the market
  • Not tax-advantaged
  • Required minimum investment and fees, as with other mutual fund products

3. Rental real estate

If you enjoy hands-on projects and staying busy, becoming a landlord in your retirement years might be a rewarding way to earn some extra income. If you already have experience in real estate, this option might give you a chance to flex your expertise in a slightly different way.

To go the rental real estate route, you need to have a significant amount of capital up front for maintenance costs and to cover vacancies while you get things up and running.

Rental real estate can provide:

  • Active way to stay involved in your local community while diversifying your retirement portfolio
  • Opportunity to invest in a tangible and familiar asset class
  • Potential for regular income
  • Tax-deductible expenses
  • Potential for property to appreciate over time
  • Option to buy a property using leverage (where you pay a portion of the total cost right away, and the balance over time)

Challenges of rental real estate:

  • Expenses related to maintenance, natural disasters, and tenants who don’t take care of your property
  • The amount of loss you can deduct (if your expenses exceed your rental income) may be limited by the IRS passive activity loss rules and the at-risk rules
  • Having to address all property issues
  • Need for a solid understanding of the local real estate market
  • Not typically a liquid asset class (it might be difficult to sell, or convert to cash, particularly in a down market)

4. Non-traded real estate investment trusts (REITs)

A non-traded REIT is a form of real estate investment that allows you to buy commercial real estate portfolios.

A REIT portfolio might include vacation properties, apartment buildings, hotels, data centers, healthcare facilities, office buildings, retail centers, self-storage, warehouses and timberland. REIT portfolios might also include infrastructure, such as cell towers, energy pipelines and fiber cables. Most REITs focus on a single type of property.

As with RIFs, REITs are actively managed by professionals who charge a fee for their management services. A REIT manager typically appoints a property manager to manage the real estate properties of the REIT. The managers collect rent from the properties and pay expenses, then distribute any income as dividends to investors.

REITs are a practical way to invest in large-scale, income-producing, professionally managed companies that own commercial real estate. As an investment, REITs can provide portfolio diversification plus dividend income.

REITs can provide:

  • Potential to generate income without worrying about personal expenses from maintenance (as you would if you decided to be a landlord)
  • Allows for investment diversification across multiple properties and property types
  • Risk-adjusted returns
  • Strong diversifier in a stock and bond investment portfolio

Challenges of REITs:

  • Can have high management and transaction fees
  • Investment is limited to a single market sector
  • Subject to changes in national, regional and local economic conditions, such as inflation and interest rate fluctuations
  • Complex investments that require investors to meet certain income and net worth guidelines

5. Total return investment approach

A total return approach provides income from your investment portfolio in the form of interest, dividends, and capital gains. This type of portfolio invests in a balanced and diverse mix of stock and bond funds.

In this context, “total” return means averaging the annual rate of returns — income and appreciation — over a longer period (10-20 years), rather than focusing on specific annual return rates. The aim is that this total return meets or exceeds your withdrawal rate.

Related to withdrawal rate, a total return approach follows a “systematic withdrawal” strategy, in which you take out a certain percentage of your investment each year, generally between 3 and 5 percent. However, this approach can deplete a portfolio quickly if you retire and begin to withdraw from your portfolio in a year with a steep market sell-off.

A total return approach can provide:

  • Meet your immediate cash flow needs while continuing to save for future growth, based on your personal level of risk tolerance

Challenges of a total return approach:

  • There is no guarantee that funds will last throughout retirement
  • Value of your exact return can vary from year to year (there is no specific withdrawal rate)

The investment options you select in retirement should take into account your timeline and risk tolerance. A financial professional can help you better understand these options and determine if one or more are appropriate for your retirement income strategy.

The more you understand your options and overall financial picture, the better equipped you’ll be to head into (or continue in) your retirement years with confidence.

Read more about retirement withdrawal strategies.