Finance: Cashing in on retirement

PHUKET: Generating an income in retirement beyond any pension or government-sponsored retirement plan has become much harder in today’s low-interest-rate environment. The income from defined pensions and even retirement benefits from government-sponsored plans are no longer a sure thing.

However, there are strategies that help to maximize income during retirement:

Dividend-paying stocks or exchange-traded funds (ETFs)

Dividend paying stocks are the best way to generate income in retirement, but picking the right stocks can be tricky. It is ideal to avoid those with the highest yields or any stock with uncertain cash flows or profits. Instead, look for well-managed, profitable companies in stable industries that also have good balance sheets and are seeing at least modest or steady growth.

With that in mind, there should be no shortage of consumer stocks, utilities, real-estate investment trusts (REITs) and master limited partnerships – usually oil or gas pipelines – with reasonable yields from 2% to 5%, but be sure to check payout ratios, as anything over 100% is not going to be sustainable in the long term. If the risk associated with picking and owning individual stocks is a turnoff, then ETFs that invest in sectors where dividends tend to be high can be a good alternative.

Fixed-income investments

Individual bonds held to maturity are a good way to receive a guaranteed stream of income – unless the bond issuer goes bankrupt. For that reason, avoid so-called ‘junk bonds’ with high yields, and be careful about investing in individual municipal bonds as municipalities and cities can, and do go, bankrupt (think Detroit).

Just remember that when interest rates rise, bond values fall, but bond values rise when rates fall.
In addition, and when investing in individual bonds, be sure to ‘ladder’ the maturities: for example – six months, one year, two years, five years, 10 years and so on – so that everything does not come due at once when interest rates are super low, like right now. Also, investing in low-cost bond ETFs can limit the risks associated with owning individual bonds.

Cash in term deposits or money market accounts

Setting aside a couple years worth of cash in CDs or term deposits and money market accounts is always a good idea. While the funds themselves will not generate much interest right now, money can still be drawn to supplement income from other sources as needed, and can be used in case of an emergency or to invest when interest rates start rising again.

As with individual bonds, try to ladder the maturities of CDs/term deposits to avoid all deposits coming due at the same time.

Annuities

Generally, annuities are a bad idea for most investors and retirees because they often come with unnecessarily high annual expenses that reward Wall Street, and high commissions that reward the financial adviser who sells them to you.

That said, having an annuity generating some guaranteed income to cover fixed expenses during retirement could make sense in some situations – but be sure to read the fine print and fully understand what is being offered.

Limit-investment expenses

A good indirect way to earn additional income in retirement is to limit the investment fees paid in the form of high commissions or annual expenses on fund products by choosing individual stocks, individual bonds and/or ETFs with low expenses and commissions.

Cut back on expenses and debt

Another indirect way to boost retirement income is to simply spend less money during retirement. Also, it is prudent to pay off any debt before entering retirement and to not take on any new debt so that interest payments will not take a bite out of income or savings.

In other words, take a reality check about the life to be lived in retirement and decide what is essential and what is not affordable.

Don Freeman is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket, Thailand. He has more than 15 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers. Call 089-970-5795 or email: freemancapital@gmail.com