Pros: The principal is safe. Cons: This strategy will generate little current income. Income varies with interest rates as CDs mature and are renewed, and income may not keep pace with inflation. Depending on interest rates, it may require a large amount of capital to generate the amount of retirement income you need. Interest from CDs is 100% taxable unless you own the CD inside of an IRA or Roth IRA. When it comes to choosing between safer investment alternatives, take the time to learn how they could be used for part of your portfolio rather than for all of your portfolio. In this way, you could use other parts to invest in things that are more likely to deliver higher income amounts. Pros: Bonds are likely to provide more income than a CD or other safe investment option. You can match bond maturities with cash flow needs. If you’re at a high tax rate, you can use municipal bonds, which are likely to deliver tax-free income to you. Cons: Income may not keep pace with inflation. Depending on interest rates, it may require a large amount of capital to generate the amount of retirement income you need. Building a bond portfolio can be difficult to do on your own, so it is important to understand how to use bond ladders before buying bonds. Pros: Historically, capital will grow, and companies gradually increase dividends, providing a means for your income to rise with inflation. In addition, many companies pay out qualified dividends, which are taxed at a lower rate than interest income. Cons: Principal fluctuates in value with market moves. Companies may reduce or eliminate dividends during tough times. It pays to understand how the dividend yield on a stock works before you go searching for yield. Pros: High amount of initial income generated. Cons: Principal will fluctuate in value. High-yield investments may reduce or eliminate their distributions during tough times. Higher-yield investments are usually riskier than lower-yielding alternatives. High yield investing can be very risky. But sometimes, the extra risk puts more income into your account. Pros: If done right, this approach is likely to generate a reasonable amount of inflation-adjusted lifetime income. The stock portion provides long-term growth; the bond portion adds stability. Cons: Principal will fluctuate in value and you must be able to stick with your strategy during the down times. In addition, there may be years where you will need to reduce your withdrawals. A balanced portfolio approach is relatively easy to follow and is flexible enough to withstand market volatility. Study the withdrawal rate rules you want to use to give this approach the greatest likelihood of success. Pros: Guaranteed lifetime income—even if you live past 100. Cons: Income will not keep pace with inflation unless you buy an inflation-adjusted immediate annuity, which will have a much lower initial payout. If you want the highest payout, you’ll have no access to the principal, nor will any remaining principal pass along to your heirs. Immediate annuities can be a good way to secure lifelong cash flow if you need the highest payout possible from your current principal. Learn the ins and outs of immediate annuities before you buy. Pros: Easy to understand and has the potential to deliver great results. Cons: In its purest form, this strategy entails taking on investment risk, but it could be modified so that you would use guaranteed income products. The “Income for Life Model” is a preferred approach for delivering retirement income. This type of model is used to fill in the pieces with a bond ladder and growth index funds. The pieces could be filled in with other options like CDs, index funds, annuities, and more. Pros: Guaranteed lifetime income that may keep pace with inflation if the market rises. The principal remains available to pass along to heirs. Cons: May have higher fees than other options—and the fees in some products can be so high that you are forced to rely on the guarantees, as the investments are unlikely to be able to earn enough to overcome the costs. Pros: A combination of several retirement income ideas named in this list is often what is needed to create the ideal income flow for your needs. Cons: Takes a lot of work to put it together right, but the hours of planning can be worth the effort for months and years to come! If you’re near retirement, the most important thing you should know is that retirement investing needs to be done differently. You need income for life—not a hot stock tip. By now, you should be ready to use these techniques in a coordinated way. And always remember—planning is not a one-size-fits-all approach. Your unique circumstances and abilities need to be considered.
