Income Options Toolkit

Advisor Toolbox

To do the job right, you need the right tools. That’s especially true when the job is your retirement.

Somewhere in your house, there’s probably a toolbox. It probably contains a lot of the same tools that are in my toolbox. But if you’re a professional plumber or electrician, you probably have another toolbox filled with thingamajigs that I wouldn’t even recognize. Let’s explore some of the thingamajigs in the toolbox of an advisor who specializes in income, in an effort to understand your retirement income options.  Including the classic income tools everyone knows about; the less well-known options; why the right strategy is as important as the right tool; and how to determine what options are right for you.

Classic Tools

First, let’s mention the income options you probably already know about.

Boring and old-fashioned. Those are terms I’ve used before to describe some of the best-known tools in an income specialist’s toolbox.  I say old-fashioned because there was a time when these tools were preferred by most Americans. They were hip. These would be the most conservative options in my box.

Things like bank CDs, government bonds, insured municipal bonds and fixed annuities.  The hipness factor for these began to fade in the 1970s when the whole retirement savings game started changing. Pension plans were disappearing, and 401ks were becoming the norm.

Then came the 80s and 90s, when a long, booming bull market made Wall Street the hip option.  That hasn’t changed much to this day. In fact, the stock market has become even more popular in recent years due to consistently low interest rates since the financial crisis. Low interest rates typically push everyday investors up the risk curve by making income options appear less attractive. And low interest rates can create challenges for the most conservative income tools, namely CDs and government bonds.

The good news is that these challenges can be minimized in a diversified, actively managed income portfolio.

And what about fixed annuities? As you may know, an annuity is a financial contract between you and an insurance company. A fixed annuity is designed to generate income based on a minimum interest rate for the life of the contract.Market changes may force the insurance company to raise or lower its rate, but that wouldn’t affect your income return.  

While these tools are all still viable, the more important point is that the options offered by today’s income specialists are more numerous and diverse than those used by your parents or grandparents. Investing for income today encompasses a wide range of tools and strategies to suit your situation and your risk tolerance level. More on that below.

Less Conservative Tools

Corporate bonds, indexed annuities, preferred stock, REITs and BDCs. These are some of the tools we categorize as moderate. That means they may carry moderately more risk than the conservative options. Take corporate bonds. Like government and municipal bonds, they can fluctuate in value depending on the direction of interest rates. Importantly, though, it must be the interest rate commensurate with the class of bond you own.  

This fact creates something called credit spread compression, which can help minimize the impact rising interest rates in your income portfolio. More importantly, corporate bonds also generate income return at a fixed rate regardless of market conditions. They also guarantee you the return of your principal if you hold the bond to maturity – and provided the corporation doesn’t default. It is that risk of default that makes corporate bonds a bit riskier than government and municipal bonds.

Like all conservative income tools, most of those in the moderate category are contract-based. This includes preferred stocks. Although a preferred is a shared stock, it pays income return at a fixed rate of dividend, and – like a corporate bond – it also has a par value.

Then there are tools such a business development companies, or BDCs, and real-estate investment trusts, or REITs. While these options do not have a par value, their underlying assets do.

Annuities are also categorized by risk and how they generate earnings. That’s why you have fixed annuities in the conservative category and indexed annuities in the moderate box. Indexed annuities pay interest based on the performance of a specific market index, such as the S&P 500. While this gives them more growth potential, it – again – also makes them riskier.

The investment options on the right are typically considered aggressive because they carry the most risk. These include common stocks, mutual funds, speculative real estate and variable annuities.

They should look familiar because these are the tools most people use throughout their working lives. That’s because they’re growth-based strategies that can make sense when you’re in the growth and accumulation stage of life. But once you’re over 50, you’re transitioning from the growth stage to the income stage. That’s when a strategy focused on income can make more sense.

But does that mean all the options in the aggressive category are out? No.  As I’ve explained before, if you want to stay in the stock market game after shifting your focus to income, you can do it. The key lies in shifting your stock strategy from one geared toward capital gains to one geared toward dividends.

When you own dividend paying stocks, you get a share of the companies’ profits in monthly dividend payments. That’s return in the form of income, which makes it an income strategy. Just be aware that investing for dividends is more challenging than investing for growth, and that stocks are always considered riskier than individual bonds.  With that said, if you have the right risk tolerance, the right dividend strategy can offer a much more practical way to invest in the stock market as you approach retirement.

Best Option for You

In my experience, the conservative and moderate tools we’ve talked about are typically the most appropriate for investors in or nearing retirement. That being said, there is no such thing as a one-size-fits all income strategy. Nor does an income specialist ever take that approach.

The tools and strategies he or she might use are based specifically on your needs and your situation, taking many factors into account. These include your age, assets, retirement timeline and your goals. For example, if you’re already retired with a very comfortable savings, a strategy built mainly around conservative, contract-based tools and strategies might suit you.

On the other hand, if you’re planning to retire within five years but are worried you still haven’t saved enough, a higher-risk income strategy might be right. That means a plan that still gives you upside growth potential but protects your downside more effectively than your current strategy geared toward growth. The main point, again, is that your retirement income options today are much more dynamic and to do the job right, you need the right tools. And when it’s a big job, you need the right professional.

Setting Up Your Toolbox

Few jobs are bigger than planning your retirement. For most people, it’s not a do-it-yourself type project. But it doesn’t have to be a daunting project, either. Yes, every situation is different. But for most people the basic objectives are the same: to have reliable income that you can’t outlive. Income that allows you to achieve your goals, meet your needs and enjoy retirement with peace of mind. As stated above, your options for achieving those goals are more numerous and versatile than ever. So much so that investing for income is hip again!

If you feel like you could use the expertise of a financial advisor and the retirement income options toolbox that an experienced advisor possesses, please contact myself, Jeff Small, to schedule your free financial analysis.

Is the economy at a tipping point?

Is the economy at a tipping point?

Is the economy at a tipping point? Inflation, rising interest rates, market volatility and talk of a new recession. That’s…
Understanding Your Retirement Account Options

Understanding Your Retirement Account Options

401k, 403b, IRA, Roth IRA… Your retirement savings options can get confusing. I’m here to help. Choosing the right type…
SECURE Act 2.0 Update

SECURE Act 2.0 Update

Now that congress has passed more changes to the laws around retirement planning, what does it mean for your plan?…
Financial Spring-Cleaning Tips

Financial Spring-Cleaning Tips

When you’re spring cleaning your house and yard this year, don’t forget your finances. Just as your house doesn’t clean…

Get Your Retirement Planning Questions Answered

We Are Here to Help

Schedule a complimentary 15-minute call with one of our advisors.