Key takeaways

  • Longer life expectancies mean your retirement savings may need to last 20 years or more.

  • Investments such as annuities, real estate investment trusts (REITs) and income-producing equities can offer additional retirement income beyond Social Security, a pension, savings and other investments.

The average life expectancy for a person who reaches age 65 in the U.S. is roughly 85 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 95.2 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% of your pre-retirement earnings. You'll need to supplement your benefits with a pension, savings or investments.

Social Security retirement benefits, intended more for lower wage earners, will replace only about 40% of your pre-retirement earnings; for a retiree who earned $100,000 a year, Social Security will only replace 33% of their pre-retirement earnings. You'll need to supplement your benefits with a pension (if available), savings or investments. 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. Income annuities

An income 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 distributed 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).

Annuities may provide safety, long-term growth and income for a portion of your retirement assets. Retirees often use annuities to supplement the guaranteed sources of income to offset the expenses that don’t go away. Since they provide income guarantees, they're often used as insurance against outliving your retirement savings.

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

Annuities can provide:

  • A 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. 
  • The potential for payments to continue for beneficiaries 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% tax penalty.
  • Risks can be higher if your annuity isn’t underwritten by a highly-rated insurance company.


2. 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 spending a portion of the average annual rate of returns — income and appreciation — over a longer period (10-20 years), rather than focusing on specific annual return rates or just using portfolio income. The aim is that this total return meets or exceeds your withdrawal rate.

“This is a way to build a retirement portfolio to meet the needs of people preparing for a retirement that could last 20 to 30 years or longer,” says Rob Haworth, senior investment strategy director at U.S. Bank. “It might offer a way to generate a superior total return compared to other investment approaches traditionally pursued in retirement.”

Related to withdrawal rate, a total return approach follows a “systematic withdrawal” strategy, in which a certain percentage of your investment is taken as a distribution each year. The distribution amount generally ranges between 3 and 5% of the total value of the portfolio.

A total return approach can provide:

  • A way to meet your immediate cash flow needs while continuing to build savings for future expenses, which are likely to rise over time due to inflation.
  • The ability to utilize a broader range of assets than is the case with more typical approaches to retirement income.
  • A stream of portfolio withdrawals that may be generated primarily by capital appreciation, potentially a more tax-efficient form of income.

Challenges of a total return approach:

  • There is no guarantee that funds will last throughout retirement.
  • The value of your exact return can vary from year to year (there is no specific withdrawal rate).
  • Withdrawals from annuities prior to age 59 ½ may be subject to a 10% tax penalty.
  • Assets may run out prior to the end of retirement, particularly in circumstances where investments suffer significant declines in the early years of retirement.


3. Publicly-traded real estate investment trusts (REITs)

Real estate is often attractive to retirees to generate income. While you can directly own and manage rental properties, a more practical option for most is to invest in REITs. This investment vehicle is somewhat comparable to a comingled fund; however, rather than owning securities, it invests in income-generating real estate.

Publicly-traded REITs are listed on major stock exchanges, so you can buy and sell this type of REIT as easily as you can trade stocks. Prices fluctuate on a daily basis. “This price fluctuation is a consideration for investors, because it isn’t just the underlying value of the assets held in the REIT that affects the price,” says Haworth. “What you pay for a REIT or the price you receive when you sell a REIT may be affected by outside factors that impact the broader investment environment.”

REITS often focus on specific types of properties (i.e., residential real estate, office properties, warehouse/industrial space, etc.) and derive income from rents paid by tenants of the owned properties. Most REITs are classified as equity REITS and are focused on generating steady income from rental properties. There may be some capital appreciation potential if properties are sold. Mortgage REITS generate income through loans to other real estate owners and operators. Hybrid REITs combine both strategies.

Publicly-traded REITs can provide:

  • A source of regular income that can contribute to a long-term retirement cash flow strategy.
  • Diversification for a portfolio made up primarily of stocks and bonds.
  • A liquid asset that’s easy to buy or sell on the open market.
  • The opportunity to choose from a wide range of REITs, each with a specific investment focus.

Challenges of publicly-traded REITs:

  • The underlying value of the investment is subject to day-to-day price fluctuations, which often don’t reflect the actual value of the properties owned, but other market factors.
  • Limited capital appreciation potential; REITs are required to pay 90% of income to investors, leaving limited funds remaining for reinvestment.
  • Income earned by investors is taxed at typically higher, ordinary income tax rates.
  • Management fees on REITs can exceed those for other types of managed investments, such as mutual funds.


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

A non-traded REIT is a form of real estate investment that allows you to invest in a professionally managed portfolio of commercial real estate. This is a non-liquid asset that investors generally hold for the term of the trust until it is liquidated by the management team. As such, it is different from publicly-traded REITs, which can be bought and sold on public markets.

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

These portfolios are actively managed by professionals who charge a fee for their services. A REIT manager typically appoints a property manager to oversee day-to-day operations of the real estate properties owned by the REIT. The managers collect rent from the properties and pay expenses, then distribute any income as dividends to investors.

“Non-traded REITS are not affected by day-to-day price volatility as is the case with publicly-traded REITs,” says Haworth. He cautions that in periods of economic distress, non-traded REITs can experience some challenges. “Because difficult circumstances that are unfavorable to the real estate market in general can arise at times, investors need to look at this as a long-term investment.”

Non-Traded REITs can provide:

  • Potential to generate income from real estate without having to be responsible for managing the properties.
  • The ability to establish an ownership stake in multiple properties and property types.
  • A regular stream of income (in most types of non-traded REITs).
  • Diversification for a portfolio made up primarily of stocks and bonds.

Challenges of Non-Traded REITs:

  • Often have high management and transaction fees.
  • Non-traded REITs have no liquidity; you’re locked in for the term of the REIT or subject to penalties for early withdrawal.
  • 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. Income-producing equities

While people primarily invest in stocks to generate capital appreciation in a portfolio, some equities generate income in the form of dividends. Publicly-traded companies frequently share their profits with shareholders by paying dividends. Not all stocks pay dividends, and of those that do, certain stocks tend to pay higher dividends than others.

“Stock dividends became much more attractive when we experienced an extremely low interest rate environment in the bond market,” says Haworth. “It can be an effective way to diversify your income stream and generate competitive yields.”

Stock dividends are typically paid on a quarterly basis. At times, companies may pay a “special dividend” due to unusual circumstances, but those are uncommon and not something you should count on. Unlike most bonds, however, stock dividends can vary with each period that payouts are made. You need to be prepared for a degree of uncertainty with dividend payouts.

If your primary focus is to invest in a stock for income, it’s important to review its dividend-paying history. Stocks with a reliable history of consistent or steadily increasing dividend payouts are likely to be the most attractive to consider for this purpose.

Income-producing equities can provide:

  • A regular stream of income paid by companies that generate strong earnings and make consistent dividend payouts.
  • The opportunity to benefit from the capital appreciation potential of stocks that also generate income.
  • A “built-in return” on your equity investment regardless of the stock’s price performance.
  • A diversified source of income for a retirement portfolio.

Challenges of income-producing equities:

  • Principal value is subject to more fluctuation than other, traditional income vehicles such as bonds.
  • Not all companies are reliable and consistent in their dividend payouts.
  • Stock dividends may become less attractive as interest rates move higher.
  • Dividend income is subject to tax at higher, ordinary income tax rates.

The investment options you select in retirement should take into account your timeline and risk tolerance level. 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.

Learn how we can help you plan your retirement income strategy.

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