As people anticipate retirement, they start thinking more seriously about how to generate income in their golden years when they are no longer employed. Many rely on personal savings, pensions, Social Security, and other retirement accounts to cover their expenses.

However, with lifespans increasing and the costs of healthcare, housing, and everyday living continuing to rise, traditional sources of retirement income alone may no longer be enough for many. This is where investing retirement savings prudently becomes important.

Real estate is often seen as a safe investment for retirement due to the stability of rental income and capital appreciation potential over the long run. However, investing solely in real estate also carries risks like tenant issues, maintenance costs, and lack of liquidity compared to other assets. Diversifying retirement savings across multiple investment types can help reduce risks while still generating adequate returns.

Bonds

Bonds are one of the most common alternatives to real estate that retirees rely on for consistent income generation. Bonds essentially function as loans to governments and corporations, with investors receiving interest payments on a regular basis until the bonds mature and the principal is returned.

Types of bonds to consider:

Treasury bonds: Treasury bonds, also known as T-bonds, are considered one of the safest options as they are backed by the U.S. government and have little credit risk. However, their yields tend to be lower than other bonds.

Municipal bonds: Municipal bonds, or “munis”, are issued by state and local governments and agencies to fund projects. The interest received is usually exempt from federal taxes and sometimes state/local taxes too, providing an added benefit. Credit quality and yields vary based on the issuing agency.

Corporate bonds: Corporate bonds offer greater yields than Treasury or muni bonds to offset slightly higher default risks. Large, well-known companies tend to have lower credit risks than smaller corporations. Bonds are rated based on their creditworthiness.

Bond funds: Buying individual bonds requires a sizable minimum investment, so bond funds providing diversified exposure are more accessible for many retirees. Actively-managed and index bond funds are both good options.

The steady interest payments from bonds can serve as a fixed income stream in retirement. Being less volatile than stocks, bonds also help diversify a portfolio. However, the principal is at risk if holding to maturity. Bond prices fluctuate inversely with interest rates as well.

Dividend Stocks

While seen as riskier than bonds, dividend-paying stocks are another proven way for retirees to generate reliable income from their investment portfolios. Companies that have paid dividends for many years and continuously increased them make for the best dividend stocks to consider for retirement income purposes.

Stocks like those in the S&P 500 Dividend Aristocrats Index have not only paid dividends regularly but raised them annually for over 25 consecutive years. Other sectors like utilities, healthcare, and consumer staples are known for their long histories of dividend payments as well.

Pros of dividend stocks:

• Companies committed to dividends serve as indicators of strong cash flows and profits.
• Dividends provide shareholders with regular quarterly or annual interest-like payments while still offering the potential for price appreciation over the long run.
• Stocks tend to outpace inflation better than fixed-income instruments alone over decades.
• By reinvesting dividends, compounding can power portfolio growth substantially.

The main risks with stocks are short-term volatility and the possibility of dividend cuts during economic downturns. So focusing on higher-quality, diversified stocks and holding them for the long haul helps maximize their income and wealth generation potential for retirement. Dividend ETFs provide an easy way to build a diversified dividend portfolio.

Exchange-Traded Funds (ETFs)

ETFs have emerged as one of the most popular investment vehicles for retirees in recent years. ETFs allow easy, low-cost access to a broad basket of stocks, bonds, commodities, or other assets combined into a single investment. Retirees can benefit greatly from ETFs due to certain key advantages:

Low costs:

ETFs have much lower ongoing expense ratios than actively managed mutual funds on average, often below 0.10-0.25%. This means more investable returns stay in investors’ pockets.

Diversification:

A single ETF holding numerous individual securities provides instant diversification. Sector, regional, bond, and other types of ETFs allow targeted, diversified exposure.

Liquidity and accessibility:

ETFs trade like stocks on exchanges and have minimal minimum investments, so they are more liquid and accessible investments for retirement portfolios compared to illiquid assets.

Range of options:

There are now ETFs focused on stocks, bonds, commodities, and factors for different needs – income, growth, global diversification, etc. Both passively managed index funds and actively managed funds are available.

As such, ETFs can form a core holding for retirees across multiple asset classes while keeping costs low. Combining diversified ETFs focused on dividends, bonds, and stocks is a prudent way for many to meet their income and growth needs from a single portfolio. Automated investment plans further simplify the process.

Covered Call ETFs and Options

Covered call ETFs and covered call strategies can generate extra income from stock portfolios in retirement. A covered call essentially involves an investor selling or “writing” call options on stocks they already own in exchange for immediate premiums received upfront.

This creates income but caps upside gains if stocks rise significantly past the call’s strike price before expiration. However, many retirees may prefer the tradeoff of potential capital gains being traded for premium income. This can boost yields while still participating in stock upside to some degree.

Some ETFs like the Global X Nasdaq 100 Covered Call ETF (QYLD) and the Qualified Dividend Income ETF (QDIV) automatically write covered calls on holdings to generate additional income yields of 7-10% annually, significantly higher than regular equity ETFs or mutual funds. This extra income stream is both steady and tax-efficient in retirement accounts.

The main risk is missing out on a substantial upside if stocks surge well above strike prices. However, the covered call strategy has historically provided reasonable long-term returns while generating steady premium income. This makes covered call ETFs well-suited for conservative retirement income portfolios.

Annuities

Annuities are insurance products that guarantee income for either a specific period or lifetime in exchange for an upfront lump sum or ongoing premium payments. There are different types of annuities appropriate for different situations:

• Immediate annuities: Provide either fixed or variable monthly payments starting right away in exchange for an upfront deposit. Payments last a lifetime or set period.
• Deferred fixed annuities: Deposits grow tax-deferred until annuitization when fixed monthly payments start, lasting a set period or life.
• Deferred variable annuities: Investment returns aren’t guaranteed but provide the potential for higher growth than fixed annuities. Income payments vary depending on underlying investment performance.

Annuities appeal to those seeking guaranteed lifetime income but do carry fees, costs, and surrender charges if accessed before their intended purpose. Annuity income will continue even if the account value drops to zero, but premiums are non-refundable. Consulting a fee-only advisor can help determine if and how annuities fit specific retirement goals and budgets.

Master Limited Partnerships (MLPs)

MLPs are publicly traded partnerships that own energy and natural resource infrastructure assets like pipelines, storage, and processing facilities. They provide an alternative income stream outside of traditional stocks and bonds. MLPs must pay out the majority of their cash flows as quarterly distributions to unit holders.

The tax treatment of MLPs is complicated, but distributions retain character for tax purposes – capital gains treatment if an asset is sold for gain by MLP, ordinary income treatment for distributions received. Holding MLPs in retirement accounts avoids tax complexities.

MLPs yield significantly higher than broader markets on average, around 6-8% annually, depending on commodity prices. However, they also tend to be more volatile than broader markets. Diversifying across high-quality MLPs can help mitigate single-stock risk while benefitting from the inflation-protected nature of energy infrastructure assets.

Farmland

Investing in farmland through REITs, private partnerships, or direct ownership can also add diversification and stable income potential to a retirement portfolio. Farmland has historically provided inflation-protected returns over the long run from rental income and appreciation as demand for food and crop prices increase over time.

Returns are less volatile than stocks yet still outpace inflation in the 3-5% annualized range historically. Stable tenants in the form of multinational agriculture companies or family farmers help insulate income from economic swings as well. The crop diversification provided by a diversified portfolio of agricultural land further reduces risks from factors impacting any single crop.

Drawbacks include high minimum investments for direct ownership, lack of liquidity compared to publicly traded assets, and exposure to weather and supply/demand factors impacting crop prices in the short run. Ongoing management and maintenance costs also need factoring in. Farmland REITs provide access to the asset class using modest amounts through a 1031 exchange or regular investment account.

Overall, farmland presents a viable alternative income-producing real asset class with the benefits of stable long-term appreciation potential, inflation protection, and diversification when combined with other retirement holdings in portfolios. Careful due diligence and choosing reputable sponsors remain important when investing.

FAQs

How much should be allocated to different asset classes in a retirement portfolio?

There is no single answer, as it depends on individual factors like age, other assets/income sources, risk tolerance, and goals. As a general guide:

• For those 10+ years from retirement, a 60-75% stock/25-40% bond mix may be suitable.
• For those within ten years of or in retirement, a more conservative 40-60% stock/40-60% bond mix is often recommended.
• Adding 5-10% in alternatives like those discussed can further diversify while enhancing income.

Periodic adjustments may be needed based on market conditions and lifespan expectations as well. Consulting a financial planner can help craft an optimum asset allocation strategy.

What are some tax-efficient investments for retirement accounts?

Some of the most tax-efficient options include municipal bonds, dividend stocks held long-term in taxable accounts, and ETFs focused on qualified dividends. Others include REITs, MLPs, and annuities when held in retirement plans. Income and capital gains from these grow tax-deferred or are tax-free when withdrawals are taken correctly. This maximizes compound returns significantly over decades.

Are there recommended online tools for managing a retirement portfolio?

Some top online portfolio management platforms for retirees include Fidelity, Schwab, and Vanguard. They offer easy-to-use dashboard interfaces for tracking all accounts, placing automated trades, customizing asset allocations, running simulations, and generating reports. Many also provide financial planning calculators, research tools, and access to advisors for help with investment selection and strategy adjustments over time.

How can risks be mitigated when investing for retirement income?

Key ways to reduce risks include diversifying across asset classes, investment vehicles, and holdings, minimizing fees/expenses, automating rebalancing to buy low and sell high, implementing a withdrawal methodology based on total returns versus sell strategy, focusing on high-quality holdings with long histories, keeping adequate emergency funds and seeking professional advice periodically. Re-evaluating goals and timelines as life expectancy rises is also prudent.

When is it appropriate to shift to lower-risk investments?

For most retirees, it is generally recommended to gradually shift to lower-risk investments throughout retirement. As a good guideline:

• In the 0-5 years before retiring, begin reducing stock allocation to under 50%.
• In early retirement years 0-10, maintain a balanced portfolio with 40-60% stocks for growth.
• During retirement years 10-20, further reduce stocks to 30-50% and rely more on bonds and alternatives.
• For those 20+ years into retirement, a 20-40% stock allocation may be suitable depending on other assets and the needed withdrawal rate.

However, personal factors also influence decisions, so consulting a professional is advisable for developing individualized retirement income strategies.