Finding the Best Retirement Income Investments in a world of super-low to negative interest rates has become a real challenge.
With central banks the world over – including the newly flip-flopping Fed – signaling renewed monetary softness and an extended period of surreally low rates, a good return is hard to find.
Gosh, these days even some junk bonds – yes JUNK bonds – are being bid so high as to offer negative yields, giving you the privilege of getting back at maturity less than you invest, if the bond doesn’t default first.
So where’s a senior to find a living return on investment?
Let’s begin by tying off the bond vein, to hopefully avoid some bloodletting. Bonds, don’t you know, are basically loans to governments or companies, and bond owners get paid interest until maturity, after which they get the maturity value, provided there’s no default.
Note the maturity value may be more or less than your “principal,” depending on what you paid for the bond. If you paid more than the face or maturity of the bond – if you paid a premium, common in times of low rates, like now – the bond will mature to less than your investment, and probably the current market value you see on your statements.
This is why the “coupon rate” – the annual interest divided by the face of the bond – is often higher, these days, than the yield to maturity, which is the annual interest divided by the current value. This is how the bond market adjusts for changes in interest rates.
You have to pay more for a 7% coupon bond in a 3% interest rate world. Getting back less at the end than you pay now is how you really only get 3% on a “7%” bond. “Careless” (I’m being charitable here) brokers may only pitch the 7%, but you need to look at the YTM to understand what you own, and many bond holders we know don’t.
But the broader issue with bonds is that most have no way to keep up with inflation or give you a shot at growing your wealth, like stocks and other equity investments do. And you need some growth, if only to have your retirement income keep up with rising medical and other living costs. Bond are usually kept to serve as ballast rocks in a portfolio, to damp out volitively, not provide growth. But when purchased during periods of low rates, they have the potential to blast through the bottom of your hull and scuttle your ship instead, if rates rise. Of course, this time may be different, and rates may stay low forever. But probably not.
Anyway, stocks are typically used to fill in the growth component, and also provide income if dividend payers are emphasized. Dividend yields of 5% or more are thoroughly obtainable in today’s environment, without giving up meaningful appreciation potential. For suggestions by this author on how to shop for blue chip stocks, with a list of twenty five attractive names, click here.
Other equity investments can fill the retirement income bill as well. Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs) offer securitized investments in real estate or other projects like petroleum or pipeline infrastructure that can pay juicy income and offer appreciation potential as well. Many also offer tax benefits when purchased in non-qualified (like non-IRA) accounts. The kind that are publicly traded are much more liquid – and sport far lower commission costs – than the non-public ones you need a salesperson and subscription agreement for.
Going a step further, buying and running your own real estate – rental houses or apartments are simple but you can do commercial like office or retail as well – can be even more profitable and rewarding in other ways, but be prepared to spend time slowly learning the business, and have some time to actively work it as a part time business – to avoid disaster.
And, of course, you can always keep working, or find a part time job, to produce supplemental “retirement” income. In today’s tight labor market your skills are bound to be in demand, and with increased longevity meaning there’s no telling how long you will live and need income for, this could make a lot of sense. There’s also sound reason to believe working longer will keep you sharper, more vital and alive longer, believe it or not!
Fill out a form on this website or call us to learn more about real estate and related investment options for you today!