If you are investing for income, you are probably very perplexed by the extremely low interest rates available today. This is especially difficult if you are retired or want to retire now. If you’re very lucky, you might get 2% for a CD. After inflation and taxes, you’re losing money, of course. But you’d still consider yourself fortunate to snag those “attractive” rates.
Fortunately, there are alternatives to these low-paying alternatives. I’m going to share a few ideas with you, but they are not intended to give you specific investment advice. You should invest based on your particular needs, situation and comfort level (ability to take on risk).
With that in mind, here are 5 ideas you should consider if you’re interested in investing for income. Consider adding these to your list of the best retirement investments:
Wait. Didn’t I just say that CDs stink right now? Yes I did. And these won’t help you get the money needed to retire. But you still might invest in CDs if you have no appetite for risk. Nobody wants to buy long-term CDs right now because the commonly held belief is that interest rates are going up. Well…interest rates probably will go up, but we don’t know how long it will take before they do. Nobody knows where interest rates are going and/or when they’ll make their move.
Since there is no “knowing,” the best approach is to take a “laddered” approach. Buy a three-month, six-month, nine-month and 12-month CD today. Then, when each CD comes due, extend it for a year. So, three months from now, you’ll roll the three-month CD into a 12-month CD. Six months from now, roll that six-month CD into a 12-month CD. This way, you’ll have money coming due every three months, but you’ll be (eventually) earning one-year CD rates.
Bonds are tricky. There are a variety of different bonds and each has their own level of risk. High-yield bonds (or junk bonds) pay more interest than more secure bonds because they carry a higher risk of default. If you’re investing for income and you like the idea of bonds, consider investing over a broad spectrum of instruments. Look into high-yield, sure…but also consider U.S. Government Treasury bonds. Think about international bonds too. Again, we don’t know how different markets are going to perform or what interest rates are going to do. Diversify to reduce your overall risk. Other options include preferred shares. They are different from bonds but more similar to fixed income than equity. They are worth your consideration.
3. Real Estate
Real estate prices are low, as are interest rates. This could be a wonderful time to invest in real estate and lease out your properties. Just be careful about the market you invest in. Some locations (like Southern California) are still priced so high that the rental income is still very low compared to the purchase price. Real estate prices may stay low for some time. Nobody really knows. But if you’re looking for income, who cares? Look for real estate markets where you can rent your property out quickly and in places where the prices make sense. If you do that, you’ll be able to hold on to the property through this decline in prices and happily cash your rent checks every month.
Equities are one of my favorite ideas if you are interested in investing for income. In fact, it’s one of the best ways to do so. The concept is that you invest in a broadly based portfolio of funds and withdraw 4% of the value of the account each year.
Some of this return will come from dividends (read “What Is a Dividend?“) and some from growth in value.
Sometimes, you’ll earn much more than 4% and your account will rise in value. Other years you’ll earn less than 4% or even lose money. When that sad day happens (and it will), your account will actually lose value. Those will be difficult years.
But study after study proves that over many years, using a balanced equity portfolio is one the best way to provide for your retirement income over many years. In fact, if you’re worried about inflation – and you better be – you simply can’t ignore equity as a tool to help you in the future.
While using equity investments when you’re investing for income, short-term pain is to be expected. Over the long run, it’s usually more than worth it.
The final way to invest for income is to loan out your money. You can do that with unsecured loans (read my Lending Club Reviews post for more information). Or you can provide mortgages for people who otherwise can’t qualify for a loan. This can be somewhat risky, but if the borrower doesn’t pay up, you can always evict them and sell the property to someone else. If you go this route, you’ll charge higher interest than the bank because the borrower is likely to be someone with a spotty credit history who probably needs to improve their credit score before the bank will lend them any money.
Loaning out your money for mortgages gives you security, but you should really be careful before you jump into this business. Make sure to familiarize yourself with eviction laws, foreclosure rules and even bankruptcy procedures. The last thing you want is to own a piece of property with a deadbeat tenant.
You can see that the banks aren’t the only option for investing for income. But did you notice that each alternative has different risks? That’s right. If you want the same security as a bank, then you have to invest in the bank. The bank offers just about the least risk of losing your capital there is. Of course, after tax and inflation you’ll be losing money, but you’ll have absolute certainty that your principal will be there when you want it.
None of the other 5 ideas offers that same protection. They all offer much higher return potential, but they have different risk profiles. The question is, are you willing to accept greater risk? There is no right or wrong answer. The only mistake you could make is to insist on getting high returns with no risk. People who do that are just asking to be taken advantage of.
How are you investing for income now?