Where to Find Retirement Income

October 22nd, 2012
in contributors

Money Morning Article of the Week

by Peter Fleming, Contributing Writer, Money Morning

Yields  on most of today's fixed-income investments are at or near historic old-manlows.  Money  market funds are generating little if any return. Certificates of deposit aren't  doing too much better.

Even  10-year Treasury bonds are only yielding around 1.75%. A slow recovery, ongoing  debt problems in Europe and uncertainty about future economic growth have sent  many investors rushing to the safety of Treasury bonds, driving down yields.

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And  the problem isn't going to get better anytime soon. In mid-September, the U.S.  Federal Reserve Bank announced its latest round of "quantitative easing" or QE3. Designed to stimulate the economy,  the move is expected to keep interest rates low through at least the middle of  2015.

This  is a dangerous environment for those searching for sources of retirement  income.

Low Rates Kill Retirement Income

Low  interest rates are a problem for virtually all investors, but are particularly  troublesome for retirees, who need their assets to generate income to  supplement Social Security and private pensions to help pay for day-to-day  living expenses.

This  is just another obstacle facing Americans, who have already not saved enough,  in assuring themselves a secure retirement.

According  to the Employee Benefit Research Institute 2012 Retirement Confidence Survey, only 14% of workers say they are  "very confident" that they have saved enough money to live comfortably in their  retirement years.

While  part of the problem is due to simply not setting aside enough money, the difficulties  are compounded by the changing retirement landscape. A generation ago, our  parents and grandparents depended on Social Security, a private pension and a  small nest egg to pay for retirement.

Not  so today.

According  to an ING retirement survey, Retirement  Across the Ages, only about 47% of those over age 65 are receiving payments  from a traditional pension plan. For younger workers, that number drops  significantly. And the promise of receiving a significant amount of money from  Social Security weakens with each passing year.

That  means that people who are retired today, or those who plan to retire soon, need  the money they have accumulated in 401(k) plans, IRAs and private savings to  work even harder for them. Otherwise, they risk not having enough assets to  fund a retirement that could last for 20 to 30 years or more.

The Hunt for Retirement Income

All  of this leaves retirees searching for income in an environment where yields  above 1% or 2% are very difficult to find without making a long-term commitment.  But there are alternatives.

Here  are just a few options that retirees might consider.

Cut your  expenses. This first suggestion is more about financial planning and less about the investments  you select. But it deserves a mention. For some people, making the transition  from your earning years to retirement is difficult. Theories vary about how  much income you need in retirement but experts suggest that you plan to have 70%  to 80% of your pre-retirement earnings. If you are healthy and planning to travel,  that amount could be higher. If you are less healthy, that amount could still be  higher due to increased medical expenses.

Either way, most people need to trim  their expenses when they retire. If necessary, work with a financial counselor  who can offer budgeting assistance and make suggestions on where you can cut  back. Remember, the lower your expenses, the less income you need and the less  chance you will have to invade principal to help pay those expenses.

Widen your  horizons. Simply put, you may need to take on more risk to generate the income you  require. While the traditional advice has always been that retirees cut their  exposure to risk as they get older, that advice simply may not work in today's  historically low interest-rate environment. Rather, investors may need to be  willing to take on more risk until such time as the interest rates on  traditional retirement investments such as money market funds, certificates of  deposit and government bonds return to more acceptable levels.

Stay  diversified. Even if you are already retired and need a portfolio that generates income,  it's important that your investments still have an element of growth. If you  are 68, for example, your retirement could last another 15 years or more. That  means investing in stocks and other assets that have the potential to grow in  value is important to make certain you don't outlive your assets.


Related: To discover six great dividend-stocks,  Click here.


Consider other  investments. Government and corporate bonds aren't the only ways to generate income. Here  are some investment alternatives you should consider.

  • Immediate fixed annuity.  Although interest  rates are low and expenses can be high, purchasing an immediate annuity with a  portion of your assets can be a good way to generate an income stream that you  can't outlive. While variable annuities may sound attractive, they aren't  generally a good investment for older investors because it takes too long to  cover the expenses the insurance company charges.
  • Exchange-traded  funds. Investors are increasingly turning to exchange-traded funds that specialize in  dividend stocks to generate yield-and some growth. According to Martin  Hutchinson, Global Investing Strategist for Money Morning, investors  can use higher-yielding dividend stocks as a partial replacement for bonds.  And, he says, "their dividend yield is just as reliable as a bond yield, and  should increase with inflation and economic growth."
  • Master limited  partnerships.  These trade like stocks and provide the equipment companies need to drill or  transport oil and gas. Because the law requires them to pay out 90% of their  income, a portion of which is tax-free, their high yield makes them a great  retirement investment, although not in an IRA or retirement plan. But some  companies have introduced master limited partnership mutual funds and ETFs that  might work.
  • Alternative  investments.  Some alternative investments are a great way to generate income. These include  managed futures, REITs that are not traded on exchanges and long/short funds,  which use a strategy similar to hedge funds. But be careful, some of these  investments are riskier than simple stocks, bonds and mutual funds. So look  carefully before you invest.

It  Won't Last Forever

Creating retirement income today is more  difficult than it has ever been. But the good news is that low interest rates  on bonds, certificates of deposit and government securities won't last forever.

Reevaluate your portfolio regularly as  your goals and market conditions change.

Eventually, yields will go up again and  it will be easier to find good sources of retirement income that you need to  create a safe and secure future.

Related  Articles at Money  Morning

The Best  Place to Look For Income Today

Recession  2013: Prepare Your Portfolio with These Rock-Solid Dividend Payers

Inflation-Proof  Investments: Go Beyond Gold and Oil with These Two Sectors

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