We all know that we will eventually need to retire and many of us look forward to the day. But inevitably, we start worrying about how we can make our money last throughout those golden years. The good news is there are plenty of investment options out there for retirees who want to live off their portfolio income without running out of cash before they run out of time.
In fact, according to a recent article from Credit Donkey, about Americans' attitudes toward retirement, the average 60-year-old with a retirement account has $172,000 in retirement savings.
Almost half of the people between 60 and 70 years old plan to rely on their Social Security benefits during retirement.
But can it be enough to last throughout retirement?
For maximum flexibility and security, you want to accumulate at least three different sources of funds, you don't want all your eggs in one basket.
That means that whatever investments retirees choose should give them access to more than one source of cash so they can adjust their spending as needed and take advantage of opportunities when they arise—as well as rebalance their portfolios periodically to bring them back in line with their long-term goals.
Here are some top retirement investment options:
1. A Retirement Income Fund
Of all the investment options retirees have, perhaps none is as straightforward as a retirement income fund.
Here's how it works: Investors contribute to this kind of mutual fund or annuity on a regular basis during their working years and then receive steady monthly payments beginning at age 65.
You invest in shares of the fund based on what you think will happen with interest rates, as with any stock market investment, there are ups and downs along the way, but investors can rest assured that they will not outlive their money—and that they'll have access to more cash over time thanks to the power of compounding.
2. Certificates of Deposit
Retirees who want safety above all else may find that investing in certificates of deposit is the most suitable option.
CDs are available through banks, credit unions, and brokerage firms, but they are FDIC insured only up to $250,000 per depositor.
These investments are safe because savers lend their money directly to the bank, which promises to pay them a specified interest rate during the term of the CD.
CDs are good for people who want short-term liquidity.
3. Short-Term Bond Funds
We recommend that investors take some of what they have in cash or shorter-term bond funds and put it into longer-term mutual funds or even stocks—assets that will offer higher returns but with greater risk. That's because one of the most compelling reasons to retire is to diversify your portfolio.
Retirees who are not as concerned with safety may want to put some of their money into stocks, mutual funds, or exchange-traded funds—all of which offer greater returns than safer investments like CDs and short-term bond funds but carry more risk.
You can go into the stock market and invest in companies that you know will grow over time, they're going to give you long-term growth potential.
Of course, retirees also have several options for generating income from their dividend-paying stocks:
They could buy a high-yielding stock and sell it when its price rises, collect a cash dividend each quarter, or reinvest the dividends back into the company.
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4. Variable Annuities (or Retirement Income Accounts)
Variable annuities and retirement income accounts offer retirees a variety of ways to generate cash flow for themselves throughout their golden years—but they also come with fees and charges that make them far from ideal investments.
These vehicles work like mutual funds, but sometimes investors need to meet certain requirements before they can begin receiving regular monthly payments. One downside:
Retirees typically must keep these funds intact until age 85 or older, although some companies allow you to withdraw up to 10% annually without facing penalties. It's easy to get your hands on this money as long as you're willing to wait.
5. Exchange-Traded Funds
Retirees who want to get more aggressive with their retirement portfolios may feel more comfortable investing in exchange-traded funds than stocks. ETFs track a basket of assets and trade like individual stocks on an exchange, so investors can buy and sell them throughout the day.
They offer diversification at lower prices than most mutual funds or through annuities—and some charge annual fees of less than $100. ETFs are good for people who want better returns but don't necessarily need immediate income.
6. Laddered Bonds
Another way that retirees can generate steady income is by laddering bonds. This strategy requires buying several different types of bonds that mature on various dates; in doing so, you're guaranteed to have a steady stream of income in the years ahead.
We recommend that retirees laddered their bond portfolio and hold the bonds until they mature; this way, they can collect their principal plus interest.
7. Lifestyle Funds
Retirees who wish to generate cash flow from their mutual funds or ETFs may also want to consider lifestyle funds. These are portfolios of investments that are typically more conservative than other types of mutual funds but are designed with specific goals in mind—such as generating an annual income of $75,000 per year by age 65.
Lifestyle funds give retirees more control over creating a diversified portfolio,. Of course, whether or not these kinds of mutual funds adequately prepare you for retirement will depend on what kind of lifestyle you want to maintain after you stop working.
8. Annuity Loans
Retirees can also generate income from their annuities by borrowing against them. If your insurer allows it, you can use the money as a source of cash flow or pull out some or all of the balance at any time.
Keep in mind, this is different from selling an annuity; annuity loans usually carry lower interest rates and allow retirees to withdraw money at their discretion. Annuity loans are nice because they let retirees have access to a portion of their money without triggering early withdrawal fees.
9. Reverse Mortgage
Another way for retirees to generate income is by taking out a reverse mortgage. Through this type of loan, seniors borrow money against the value of their house and receive regular monthly payments until they pass away or sell the property.
If you leave your home before making all of the installment payments, however, your heirs will be responsible for repaying any outstanding balance on your estate.
Reverse mortgages are good if you want to purchase another home but don't have enough cash flow—or if you'd like to go on vacation more often.
10. Cash-Out Refinancing
One way retirees can generate steady income from their homes without incurring costly fees is through cash-out refinancing. This move lets them pull out some or all of the equity in their homes and use it for whatever purpose they desire.
This can be a smart financial move if you need to pay a debt or help a child financially, but it's not a good idea if you want to use your home as a source of retirement income. Cash-out refinancing is only advisable for retirees who have undergone a significant change of circumstance.
11. Reverse Mortgage Loans
Retirees can also generate passive income by using reverse mortgage loans. Unlike standard reverse mortgages, these loans let homeowners draw regular monthly payments from the equity they've built up in their homes until they pass away or sell the property; when that time comes, any outstanding balance on the estate will be due.
This option can be appealing to seniors who want to supplement their income, travel the world, or pay off a chunk of debt. Of course, you'll need a large equity balance in your home for this particular option to make sense—otherwise, the interest charges could outweigh the income you receive from tapping into your equity.
12. Rental Property
In addition to using a reverse mortgage loan, retirees can generate passive income by renting out property they already own. This is one of the best ways for older Americans to create an additional revenue stream if they don't plan on moving any time soon and have enough disposable income coming in each month already.
Some people will purchase a small apartment building with four or five units, others might upgrade and add an extra bathroom or bedroom to their current house to make it more appealing to renters.
Of course, you'll need enough money to buy a second property in the first place—and while it's true that rental income can offset some of your costs, there are other factors associated with owning rental properties you should be aware of before taking the plunge, such as vacancy rates and ongoing maintenance expenses.
13. Invest in a Gold IRA or Bullion (Ages 59+, Editors Choice)
A Gold IRA uses physical gold or silver as a way for investors to diversify their retirement accounts. Instead of investing in paper assets, such as stocks and bonds, a Gold IRA such as Goldco invests using real metals that have been specifically approved by the Internal Revenue Service (IRS).
Rather than being managed by fund managers, a self-directed Gold IRA is managed by the investor. The investor has much more flexibility in choosing which types of metals are purchased for their IRAs, when they may be purchased and when they are sold.
Investing in physical gold can have significant benefits over investing in other assets. There are no fees to acquire the metal itself because it is taken directly from the holdings of an existing depository or bank holding precious metals. As well, since there are no fees for transactions involving physical gold, investors receive every possible benefit if the price of gold does increase. This includes exchanging one form of paper currency (dollars) for another type (gold). Since this conversion happens frequently, investors assume exchange rates risks as well.
Gold is sold in one-ounce weights and sometimes fractional ounces (4, 5, 10, 12.5, and 15). While prices per ounce vary depending on the type of gold that is purchased (bullion or coin), investors may choose the form of gold that they prefer to purchase for their IRA.
For most investors, however, purchasing bullion preserves capital and offers high liquidity - but it is not a good way to accrue numismatic value. Bullion contains precious metals such as silver and gold; numismatic items contain rare coins like those minted by the United States Mint or collectible items like baseball cards. Investing in stock will offer the potential for lucrative returns over time as well. It is advisable to plan on holding an IRA for some time since new options are constantly added by the government and more investment choices can enhance retirement accounts.
Investing in stocks (or other paper investments) may seem like the right choice because it offers good liquidity; however, buying physical gold bullion has its advantages as well. Gold taxes are low or non-existent depending on where the metal resides, which means that there are no capital gains taxes when selling physical gold (and very little if any income tax).
By investing directly into physical metals like gold and silver, investors gain access to better returns than they would receive with a mutual fund. This includes easy access to purchasing coins that have numismatic value at little or no additional costs. Investors also have access to a steady supply of metal that they can use to protect themselves from dollar devaluation issues.
Investing in Gold IRA accounts can be attractive because there are time restrictions on when paper assets may be converted into physical metals, which means the investor has fewer choices about timing this particular purchase. Sometimes people refer to this as a 'gold window'.
The gold window is the period of time during which all or part of an individual's traditional, SEP or SIMPLE IRA must be transferred (or 'rolled over') into a Roth IRA account. According to the IRS, "the gold window closes at one minute after midnight on April 15th." While there are ways around this rule, it is still advantageous for IRAs that now want to invest in physical gold.
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The main takeaway here is that senior citizens have opportunities to generate passive income from their assets without incurring a significant amount of risk. Sure, you could invest in a mutual fund or start your own business—and if you make the right choice, those investments could pay off handsomely. But these choices aren't for everyone; they involve risk and require plenty of time and effort to make them worthwhile.
With that said, seniors also need to be careful when it comes to generating income from their homes—because there's always the chance you'll end up regretting your decision later on down the line. If you're not careful, tapping into your equity might turn out to be an expensive mistake instead of a smart financial move.
If you're a senior citizen and want to generate passive income from your assets without incurring too much risk, the options listed above might help.
However, don't go into any of these choices blindly: Ask yourself whether or not each choice is suitable for your particular circumstances before taking the plunge.
If you do decide to use one of these strategies as a source of retirement income, make sure you have some money set aside in reserve—because there's always the chance that something could go wrong beyond your control and it would be difficult or impossible to collect on what you're owed when that time comes.
Don't forget to consult with a financial adviser if you're unsure which strategy would be right for you—and talk to your broker about commission-free trades for Gold ETFs and IRAs (if applicable).