Maximizing Retirement Income

One of the fundamental challenges of retirement is making the switch from retirement investor to retiree. That means shifting from stocks to income investments in timely and secure fashion.

Easier said than done these days. The usual route, owning U.S. bonds, is fraught with unusual new dangers. Yields are low and bond prices are high, a reversal of a three-decade trend.

Bond prices might go a bit higher, but there’s increasingly less room for that. Once interest rates begin to rise, those holding long bonds could find themselves on the wrong side of a very long unwinding.

How can you maximize retirement income without taking on unnecessary risk? Talk with your financial advisor about what makes the most sense for your situation:

Bond ladders

In a bond ladder (or CD ladder), you own a series of individual bonds bought at different times. As they mature, you reinvest the gains back into new bonds.

Pro: Since a bond is always maturing, you can easily shorten or lengthen maturities to match the risk that interest rates might rise.

Con: In the current environment only short-term maturities are low risk, yet they pay very little income.

Bond funds

A bond manager does the work for you, selling off bonds and repurchasing new ones to stay on track.

Pro: Less trouble than building your own bond ladder.

Con: High fees.

Dividend stocks

Blue-chip stocks can offer a dividend yield in excess of inflation and many beat long government bonds these days.

Pro: Easy to buy, cheap to own and you might also realize price appreciation.

Con: Dividends can be cut and stocks can fall in value.

High-yield bonds

Once commonly called “junk” bonds, high-yield bonds are issued by corporations. Another variety of high yield comes from foreign government bonds.

Pro: Better yields across the board and still a bond, rather than a stock.

Con: They were called “junk” for a reason. The higher the yield, the more you have to consider repayment risk, i.e., not getting your money back.

High-yield stocks

It’s not just blue chips. Some lesser-known companies in fields such as shipping, energy and private equity pay very high dividends.

Pro: Double-digit yields can be attractive in a period when the broad stock market dividend yield is less than 1.9%.

Con: High volatility, high risk of a dividend cut, sleepless nights if you invest in a concentrated way in these stocks.

Real estate and partnerships

Known as real estate investment trusts (REITs) and master limited partnerships (MLPs), these securities deliver income by design.

Pro: Less likely to be cut, since their legal structure requires distribution of income.

Con: They’ve been popular for several years running, so some may be overpriced now.

The better strategy going forward for those seeking retirement income is to use a collection of investments that maximize the advantages while minimizing the taxes, paperwork and risk.

The answer is to own a slice of each through exchange-traded funds that diversify at the lowest cost, all the while balancing the returns from the income portion against stocks elsewhere in the portfolio.