How to Invest for a Regular Income
If you are about to enter retirement, you will shortly be looking to replace your working income with a steady stream of income from your investments and savings. As such, you must carefully balance the need for income against the competing priorities of ensuring that you will not exhaust your nest egg and passing wealth on to the next generation. Fortunately, a number of investment options exist that will help you generate a reliable income from your portfolio, though each has advantages and disadvantages.
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Instructions
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Purchase a guaranteed lifetime income annuity. This is a contract with an insurance company in which you give up a lump sum of money in exchange for the insurance company's promise of a guaranteed level income for life, or for the joint life expectancies of you and your spouse, or you and some other person. At the end of the last lifetime, there is typically no residual value left over for heirs, though some companies offer a return of premium rider that guarantees your heirs at least the unspent portion of your premium. To compensate for the lack of residual value for heirs, many people combine annuities with permanent life insurance.
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Ladder your bonds. You accomplish this by purchasing a portfolio of individual bonds with maturities that match your desire for cash flow. In this way, you maximize your return by getting higher interest rates on longer-term bonds while simultaneously mitigating bond price volatility. Since income is your primary concern, and not price appreciation, assuming the bond issuers make scheduled interest and principal payments, you will receive a steady stream of cash as the bonds in your ladder mature.
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Consider municipal bonds. These are bonds issued by state and municipal authorities. Generally, they are free of federal income tax: Their after-tax rate of return is generally higher than taxable issues of equal credit quality, if the bondholder is in a high tax bracket.
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Purchase treasuries. You can bypass the broker by purchasing U.S. government debt via the online Treasury Department portal listed in the Resources section. Despite a number of fiscal challenges, the credit quality of the U.S. Treasury remains unquestioned. For investors seeking only income, this is among the safest ways to invest, though bond prices could swing wildly in response to changes in interest rates. For additional inflation protection, you may consider purchasing TIPS, or Treasury Inflation Protected Securities.
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Buy preferred stock. Preferred stockholders do not get a vote for the board of directors, but they do get first place in the distribution of dividends to shareholders. Corporations may not issue a dividend to common stockholders unless preferred stockholders receive their scheduled dividend first. This is a powerful incentive for companies to continue making scheduled dividend payments.
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Ladder CDs. This is a very similar strategy to laddering bonds, except the underlying investments receive FDIC protection on deposits up to $250,000. No such guarantees are available with any other security, although states do generally maintain a reserve fund to guarantee smaller annuities and life-insurance policies.
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Consider a reverse mortgage. Under some circumstances, you can sign your home over to a reverse mortgage company in exchange for a series of payments. Meanwhile, you can continue living in your home. Use caution when entering these contracts. Look carefully at what happens if you must leave your home temporarily for medical care, for example.
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Tips & Warnings
Make sure you take taxes into consideration as well. Most income from bonds and bond funds is taxable, with the exception of Roth IRA income and municipal bond income.
You may wish to hedge against inflation by allocating a portion of your income for growth.
Beware of mutual funds for fixed-income investing. Mutual funds are not designed to produce a predictable income from month to month. If interest rates decline, you could see your monthly income decline with it. If you have a lifetime income annuity or an individual bond with a steady stream of payments, your income will remain constant even after rates decline, until the bond matures. However, you may need to reinvest your bond's principal at a lower interest rate. This is one reason why it may make sense to invest part of your portfolio for growth.
