What Are the Best Investments for Retirement Income?

by Neal Frankle, CFP ®

If you’re looking for the best investments for retirement income, you’re not alone. With interest rates so low, lots of folks are asking themselves which are the best retirement investments to make right now.

As I see it, there are still some good alternatives:

1. A Component Of Equity In Your Portfolio

Remember, just because you are retired doesn’t mean your investment time horizon is short. People ask me all the time, “How much money do I need to retire?” They never ask me how much they’ll need to stay retired. You have to think about how long you want your money to last, which may not be the same thing as how long you think you are going to last.

Sure the market is dicey at the moment. So what? If you need all your money right now, you should not be in the market anyway. The market is a very long-term proposition. But you knew that already.

And by the way…your money has to last longer than you think or you may have to work longer than you think.

According to MSN.com, a very healthy 60-year-old female could easily live another 30 years or more. If you are even just of average health, you could celebrate your 80th birthday without too much trouble. That’s a 20-year timeframe…right?

That being the case, the only question that really matters is how to invest to create the most income with the greatest safety over 20 (or more) years. Of course, you will have to balance “greatest income” with “greatest safety,” and that’s a personal choice. But there is no question that over 20 years, your best bet to create retirement income will be a portfolio that includes equity.

Neal’s Notes:  Here’s an in-depth look at these two ideas plus 3 more alternative income producers.

2. Real Estate

For the right investor, real estate could be a great way to invest if you want to create retirement income. Prices are low and so are interest rates. That, my friend, spells opportunity. Does real estate offer the best retirement investment?

Of course you have to be mindful about where you buy real estate. Even though prices are low, it doesn’t mean they are low enough and it doesn’t mean they won’t drop further.

For example, you can buy rentals in some parts of the country for under $60,000 and rent them out for over $1,000 a month. But in Southern California, you’d have to invest eight times that amount and only receive three times as much income. Not worth it.

If you’re going to buy real estate, make sure you do it carefully and that the deal makes sense. Also, make sure you are well suited for this kind of investment or that you have partners who are.

What I don’t think makes sense is to buy long-term bonds or immediate annuities right now. Interest rates are low. If you sink your money into either of these options, you’ll be sorry when rates rise.

With the annuity, you’ll be stuck with a low-paying investment and you won’t have any way to get out of it. With bonds, you’ll be able to sell of course, but if rates rise when you sell, you’ll take a beating. Who needs it?

One last thing – don’t be lulled into complacency by building a diversified portfolio.  This approach can help of course but many people think that diversification offers benefits that it really does not. That’s why it’s important to be mindful of your investment approach.  Also, you have to approach investing with an open mind and this is sometimes very difficult to do.

Have I missed anything? What other retirement investments are good options for those interested in retirement? It’s tough to think long-term when the short term is rather painful, but it’s really the best way for you to make retirement income decisions.



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{ 6 comments… read them below or add one }

Jay-Ash May 31, 2012 at 10:11 PM

NW Arkansas is one such place where real estate is at very attractive prices right now. Duplexes and fourplexes are common and relatively well-priced; moreover, the area has the University of Arkansas which is an increasingly popular university with a renowned business school – the Sam Walton School of Business. My husband and his friend have recently been working with a real estate agent to find rental property at good prices. I agree it’s a worthwhile investment at this time.


yorick July 7, 2011 at 4:14 AM

High-yield dividends, and MLPs, is a combination for a retirement income portfolio that I have seen kicked around. How well that works is up for – spirited – debate. You’d have a growth portfolio on the side, as well, for “incidental” spending.

I am skeptical about using a “balanced portfolio” as an income portfolio. Is the intent to draw down on principal? I’d rather not plan to live until 95 and reach $0, and then actually live until 95 and be out of money.

Rental is a good option, if one can stand the hassle, or factors “people to take the hassle” into the equation. You’ll deal with your fair share of unpleasant renters, and the more rental properties (income), the more of those unpleasant renters. That can be handled by a rental property management service, and maybe another service taking care of legal. Those will diminish profit – if cash flow is not firmly positive after taking those management services into account, don’t jump.

The last thing I want to do in retirement is battle with unruly renters. Doing it myself is plain out. It also doesn’t scale to 3, 4, “more” properties.

College towns sound like a good place to set up if the property prices are right. Lots of potential renters that move in and out. Deposits cover the necessary repairs caused by renting to students.

On that topic, what are the “some parts of the country” that you have found to be good spots for owning rental property?


DIY Investor January 18, 2011 at 12:38 PM

On 6/25 when I wrote my post DVY (a dividend ETF) was priced at $43.07. Today it is $50.22. The dividend yield is 3.50%. Total return over this 7 month period was approx. 2% yield and 16.6% price appreciation or over 18% for less than a year.
Sell it, hold it, do what you want – a good investment no matter how you look at it. I’m holding it because I still like the yield and I think it could go higher.
I meant “reap” the economic recovery which was obviously occurring – not to sell the dividend ETF or dividend stocks.
It seems that sometimes it is easier than others to buy these stocks and ETFs. Back in June was one.


Mark November 10, 2010 at 7:56 PM

I like those two. I would add intermediate corporate bonds and high yielding ETF’s.


Financial Samurai June 26, 2010 at 6:28 AM

Real estate is a no brainer now if you have the patience. The Rentalyields now are way above borrowing costs!


DIY Investor June 25, 2010 at 3:44 AM

How about some nice high dividend stocks via an exchange traded fund. With a longer term perspective you can collect the dividends (qualified by the way and therefore low taxes) and reap the recovery in prices when the market recovers.
For those who buy individual stocks there are blogs that do some nice analysis on stocks that have increased their dividends over longer perioods.


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