How Can I Increase Income Safely In Retirement?

Today I am doing a new type of post. You might not be aware of this, but I accept reader questions. If you have any questions, please contact me. Maybe I’ll create a post out of your question. Help me by helping you in the process. You’ll be surprised how common your question might be.

As a reminder, I am not a registered investment advisor. The advice given should be see as opinion, and you are always best to do your own research on anything mentioned therein.

Reader Question: I’m Retired. How can I increase income safely? How can I increase cash flow? – Don

This is a common question I see on the net, and the drum beat is getting louder every week. I suspect it’s because of previously high yield bank CDs (ah remember the days when CDs earned 4-5% annually?) are now maturing.

Retires are looking for better places to park their cash. They are seeing what their local bank is earning, and at least educated enough to realize that it will not match the average rate of inflation (which historically has been around 3% for the last 30 years). So in terms of real dollars you will more than likely have less money at the end of investing in say a bank CD.

Even at my age (41), I still need to generate some income. Stable monthly income is an important part of any portfolio, especially if retired.

Unfortunately, at retirement age, you need a stable income and are currently getting killed in the marketplace. With the low Federal Funds Rate set for zero until 2014, traditional investments will have had earned squat for over five years. This eliminates many investments that were known to be “safe” – such as bank CDs and US Treasuries.

It is not only getting killed through traditional investments (ie CDs) that are earning below inflation rate, but also in many cases you need to match the “golden” withdrawal rate of 4%.

While you can find an Ally Bank 5-year CD earning 1.72%, that’s still below the targeted 2% rate of inflation by the Federal Reserve. The ten year treasury is worse at currently 1.63%.

What Can You Do?

There is no easy answer to this question. You really have to choose the lesser evil among other fixed rate investments. In addition, you should still keep a mixture of the other traditional fixed rate investments in your portfolio.

You really have one of two options:

1. Go up the rate curve – In plain English, this means riskier assets that earn a higher return.
2. Longer term to maturity – Buy 7 or 10 year CDs instead of 5 year.

Neither, in my opinion, is really a great option. Other than keeping some in cash, which isn’t necessarily a bad idea right now, you don’t have that many other “safe” options.

There are many alternative investments that generate income. In no particular order:

• MLPs – Master Limited Partnerships
• REITS – Real Estate Investment Trusts
• Rental Properties – Not as passive as other investments and should be thought of as a business.
• Muni Bonds – Especially makes sense if you are in a higher income bracket. Taxes are expected to increase next year.
• Peer-to-Peer Lending – Such as Lending Club or Prosper
• Corporate Bonds – Many companies are rated higher than governments, and can be thought as the new sovereigns.
• High Yield Bonds
• GNMA bonds
• Dividend Stocks – See Dividend Aristocrats
• US I Savings Bonds (I-Bonds) and TIPs – Indexed to the rate of inflation.
• Annuities
• Pay Off Debt
• Social Security

Each has their own risks and is not as “safe” as traditional CDs or US treasuries. Links are to articles in which I discuss some of the alternative investments in more detail.

Keep in mind because of the low interest rate environment we live in, many of these investments are already a “crowded trade”. Meaning people have already jumped into these investments looking for yield as well. So you can be paying a premium just to generate yield.

I recommend researching each and determine which one(s) best fit your needs. If unsure, I would recommend connecting with an independent, fee-only financial advisor (meaning they do not work for a specific brokerage, nor get paid for selling funds).

This is also to say I would not completely get rid of traditional CDs or US treasuries from your portfolio. They still should be part of your overall asset allocation for fixed income (even at current low rates). You can add the above alternative investments to smooth out your returns.

Pay Off Debt?

If you have any (and I do mean any) debt, now might be the time to pay it off or a least put money towards it. Since it’s a guaranteed return of whatever annual rate you are paying. Paying off any debt is like a reverse bond.

Social Security Is a Bond?

Social Security is not often thought of as a “bond”, but where else can you currently earn 7% annually? From a recent Wall Street Journal article, by delaying Social Security until 70 1/2 from the first year you can normally collect, it is an increase of 7% annually in your monthly payments. For some individuals this difference can be significant. So in the meantime you might pair down other investments earning at a lesser rate.

So if you aren’t collecting yet, you might want to delay, or delay your partner’s, collection of Social Security. Obviously there are a few other factors involved (such as your health), but it is an option.

Readers: Are there any suggestions you would offer?