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 letting me help you in the process. You might be surprised how common your question is.
As a reminder, I am not a registered investment advisor. The advice given should be seen as opinion, and you are always best to do your own research on anything mentioned.
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 drumbeat is getting louder every week. I suspect it’s because previously high-yield bank CDs (ah, remember the days when CDs earned 4–5 percent annually?) are now extinct.
Retirees are looking for better places to park their cash. They see what their local bank is paying and are well enough informed to realize it will not match the average rate of inflation (which historically has been around 3 percent 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 when you’re retired.
Unfortunately, at retirement age, you need a stable income and are currently getting killed in the marketplace. With the Federal Funds Rate set near zero, traditional investments will have earned squat for more than five years. This eliminates many investments that were known to be “safe” — such as bank CDs and US Treasuries.
Not only are traditional investments (e.g., CDs) earning below inflation rate, but in many cases you also need to match the “golden” withdrawal rate of 4 percent.
While you can find an Ally Bank 5-year CD earning 2 percent, that’s still just barely the Federal Reserve’s targeted 2 percent rate of inflation. The ten-year Treasury is worse, currently (February 2016) at 1.81 percent.
What Can You Do?
There is no easy answer to this question. You have to choose the lesser evil among other fixed-rate investments.
You really have only two options:
- Go up the rate curve — In plain English, this means riskier assets that earn a higher return.
- Longer term to maturity — Buy 7- or 10-year CDs instead of 5-year.
In my opinion, neither is a really great option. Other than keeping some money in cash, which isn’t necessarily a bad idea right now, you don’t have 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 make sense if you are in a higher income bracket.
- Peer-to-Peer Lending — Such as Lending Club or Prosper
- Corporate Bonds — Many companies are rated higher than governments and can be thought of 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.
- 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 we discuss some of the alternative investments in more detail.)
Keep in mind that because of the low interest rate environment we live in, many of these investments are already a “crowded trade,” meaning other people have already jumped into these investments looking for yield. So you might be paying a premium just to generate yield.
I recommend researching each and determining 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 or get paid for selling the funds they might recommend).
That is not to say I would completely avoid traditional CDs or US Treasuries. 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 toward 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 8 percent annually? By delaying Social Security until age 70, your monthly payments will increase by 8 percent each year. For some individuals this difference can be significant. In the meantime you might live on income from other investments earning 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?