From the Mailbag:
I have $3.5 million in my retirement portfolio and no debt. I am 69 years old, single and have no children. I’ve worked hard all of my life and expect to retire in 15 months.
I have $800,000 in tax-free bonds and the balance in short-term CDs. What are your thoughts on the types of investments I should be in? Keep in mind, I am a moderate/conservative investor looking for income.
I’m not allowed to give personal investment advice. So I can’t speak particularly to your situation. But I can talk about investment options for generating income in retirement.[ad#Google Adsense 336×280-IA]Interest rates are low and most investors don’t have time to wait for the Federal Reserve to raise them.
As a result, parking all of your money in savings accounts or CDs is not a viable option.
With inflation you will actually lose money.
What’s a conservative investor to do?
Well, income investments like dividend-paying stocks and bonds are a great way to help hedge against inflation and supplement retirement cash flow.
Stocks and bonds give income investors a variety of options with varying degrees of risk. Investors should never put all of their retirement eggs in one basket.
So let’s look at a few income-generating alternatives.
Perpetual Dividend Raisers
Perpetual Dividend Raisers are companies that raise their dividends every year. Building a portfolio of Perpetual Dividend Raisers will provide investors with income today to help cover their cash flow shortages. They also provide even more income tomorrow since they raise their dividends each year.
Investments in Perpetual Dividend Raisers should be long term – 10 years or more. You have to be able to handle a little risk and ride out the volatility, and you can’t bail just because Mr. Market decides to go the wrong way – he will.
The stock market does not always go up. There is a good chance we will experience a bear market in the next 10 years (or less). Stock prices will go down – even Perpetual Dividend Raisers.
But you are getting paid to wait out the bear market in the form of increasing dividend checks. You don’t have to wait for a catalyst or market turn to drive the share price higher. As an added bonus, rising dividend payouts are an excellent inflation hedge.
For a FREE list of companies that have raised their dividends over the past five, 10, even 25-plus years… click here. I’ve found this site to be a great resource.
Of course, Perpetual Dividend Raisers are just one option.
Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) rise in tandem with the government’s inflation barometer, the consumer price index. TIPS are backed by the U.S. government and provide investors with a high degree of financial security. But TIPS will contribute very little of the income most retirees are seeking. It is an option, however.
Municipal bonds are debt instruments issued by city and local governments. These bonds are issued to raise money for projects such as building schools, repairing roads or expanding utilities. They are fairly liquid and can be sold relatively quickly if an investor needs access to their principal.
Municipal bonds are popular because of their tax advantages. The interest received by the investor is exempt from federal taxes and can be exempt from state and city taxes as well. They allow you to keep more of your income out of Uncle Sam’s pocket.
Although they are less volatile than stocks, municipal bonds do carry risk. There are some states with balance sheets that are stronger than others. Overall default rates are low. But that doesn’t mean it couldn’t happen. Because they are considered a safe investment, yields are usually low and may not beat inflation.
Corporate bonds can also provide a predictable source of income. But even though experts like our Steve McDonald recommend winning trades over 90% of the time, there is no guarantee the issuer will pay you back. Backed by the company that issued the debt, the investment risk and the amount of interest paid by the bond varies greatly. The higher the risk, the higher the interest rate. As with nearly all investments, due diligence is necessary to manage default risk.
Also, depending on the bond, they can be hard to sell if an investor needs access to their principal. And like municipal bonds, investors run the risk that rising inflation will cut their spending power. The potential for capital gains is less than with stocks. But if the issuer goes bankrupt, bondholders will come out ahead of shareholders.
There are many other options out there for income investors. I believe investors should investigate as many as possible to determine which ones are right for their retirement portfolios. Investing is not an exact science and preparing for retirement requires a strategy. Sometimes it is necessary to enlist the help of a professional. Ultimately, with all of the options out there, there is a strategy to fit the needs and risk tolerance of every investor. You just have to find it.
But for income investors, the types of investments I listed above are all places to get started.
Source: Wealthy Retirement