Yahoo Finance 6 Low Risk Investments to Build Retirement Income
As you approach retirement, your investment objective will slowly shift from investment growth to generating retirement income and preserving the money you have saved. Retirees generally aim to allocate more of their assets to lower risk investments that generate cash flow and are less likely to decrease in value. Balancing risk and return becomes more important after you leave your job so that you won't run out of money in retirement. However, you might have to sacrifice some returns to reduce your portfolio risk. Here are six low risk investments that still allow you to build retirement income.
[Read: How to Cope With Stock Market Declines in Retirement.]
Real estate. Renting out a real estate property can provide cash flow for retirement. Real estate can be a good option for retirement income for those who are able to manage a property or hire a management company. However, many investors choose to borrow to acquire rental properties because it requires less money upfront. Debt on a rental property increases the risk, because the loan requires servicing. One way to reduce the risk of a rental property is to own it without a mortgage. Having no debt against the property drastically reduces the hardship experienced in the event of a costly repair. It's also easier to set aside funds for vacancy and maintenance contingencies when you're not making monthly payments on a loan.
Bond funds. The simplest way to set up a broadly diversified portfolio of bonds is to buy a bond mutual fund or exchange-traded fund. You can choose from a variety of bond fund types including passive or active, long-term or short-term, domestic or international and government or corporate bonds. Bond index funds aim to equal the returns of indexes, such as the Bloomberg Barclays US Aggregate Bond Index, which tracks thousands of bonds. The advantage of buying a fund that tracks an index is lower costs and built-in diversification. Actively managed bond funds tend to have higher managerial costs. Buying a large diversified bond fund or ETF will provide reliable retirement income and lower the risk of your overall investment portfolio.
A bond ladder. Bond ladders are a popular strategy for retirees who want to create income while reducing their bond interest rate risk. The strategy involves buying a series of bonds with different maturities in order to create a predictable cash flow. When each bond matures, income can be used for living expenses, reinvested further out the maturity timeline or invested in other ways.
A bond ladder helps to reduce interest rate risk. If interest rates rise, the maturing bond can be reinvested at improved rates further out. If interest rates fall, the bonds already held continue to earn more income than current bond availability. The strategy helps to smooth out yields and create a steadier stream of income. You can also diversify by investing in a variety of bond types from different issuers.
[Read: How Retirees Can Take Advantage of Higher Interest Rates.]
A high-yield savings account. The simplest and safest place to invest your money is a savings account. Traditional brick-and-mortar banks typically pay very low rates. However, online banks are just as secure, but have lower costs of operation, which enables them to pay higher interest rates. Transfers are done manually or at regular intervals electronically and generally take one to two business days to move between checking and savings.
Savings account yields seldom beat the rate of inflation, which makes them a poor place to invest for the long-term. However, a high-yield savings account is ideal for short-term to mid-term cash availability. These accounts pay far better than a checking account, and your funds are FDIC insured, meaning your money is safe up to $250,000 per account. Easy bank transfers make having a high-yield savings account a smart move to increase your income with idle cash.
Municipal bonds. Municipal bonds are debt securities issued by government entities, such as counties or states, that are backed by the taxpayer base. Building a portfolio of geographically diversified municipal bonds at varying maturity dates can lower your overall portfolio risk and help you diversify away from stocks. Municipal bonds are also exempt from federal taxes and sometimes state and local taxes, which can help lower your tax burden. The interest returns and tax advantages make municipal bonds a good fit for many retirees.
[Read: 8 Ways to Lower Your Stock Market Risk in Retirement.]
Time investment. Not all investments are made with money. If you have the desire to continue to earn money in retirement, consider investing your time in a small business venture or part-time job. Hobbies and interests can often be transformed into small businesses without a large cash investment. Research your favorite hobbies to see how you might be able to earn some income from what you already love to do. Investing your time in a part-time job is a low risk way to build retirement income. However, you'll need to balance your desire for more money against your desired retirement lifestyle. Searching for a job you enjoy will make your efforts more fulfilling.
Craig Stephens is a blogger at Retire Before Dad.
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