It can be overwhelming and intimidating to determine the best strategy and tools to supplement your regular income in retirement, that difference between your predictable retirement expenses and your predictable retirement income.
Most retirees will have some gap that must be funded each month. In this article, let’s talk about the broad categories of tools that can meet this goal.
Guaranteed Income Annuities
A popular way to cover an income gap is through an income annuity. At the core, the investor is relying upon an insurance company to provide lifetime income payments in exchange for premium dollars. The owner cannot outlive these payments, similar to a pension. There are many types of annuities that can create guaranteed income, so it is important to pick the one that is most appropriate for you, with the highest amount of income that can be generated with a fee structure that you are comfortable with.
Regardless of the performance of the stock market, these income annuities will cover the retirees income gap.
Interest or Dividend Producing Investments
Some prefer to use non-annuity alternatives. Some investments create an interest or dividend from the investment principal that can be used as the source for the income gap.
One common dividend producing investment is a REIT, or real estate investment trust. As a part owner of the underlying income producing properties in the portfolio, you are also entitled to a pro rata portion of the rental income that comes from this income producing property.
Although the value of each share of a REIT may fluctuate, dividends are paid based upon the number of shares owned, creating a predictable cash flow source regardless of the value of the REIT shares.
Another example of an interest producing investment is a First Trust Deed. Many investors mutually fund loans which companies repay over time. The loans are short term (average of 9 months) and secured by the land or property of the real estate project that is being completed. These underlying properties being constructed/built are in the name of the investors until the loan is paid back.. In the event of a default on the Trust Deed, investors foreclose upon the property to recoup their original investment. The interest generated each month from the loan repayment is paid into the investor’s account and can be used as a predictable way to cover the retirees income gap,
Since First Trust Deeds are not correlated to the stock market, this type of investment can provide predictable cash flow regardless of the market’s ups and downs.
These are just two examples of investments that produce dividends or interest apart from the performance of the stock market.
The bottom line is that your supplemental income should come from sources that are not dependent on positive market performance. You can still have market sensitive investments, but you want to make sure that they are for your “growth bucket” that has at least a 5-7 year time horizon.
If you have any questions please feel free to contact me.