Best Retirement Assets to Create Income

You might be retired now or retiring in the next five years, or retirement might be a distant light at the end of a tunnel. It doesn’t matter where you are along this continuum. You should be accumulating the right retirement assets now, so when you stop working your income won’t stop too. There is always the option of looking into entrepreneurial ideas and starting a business when you retire, but let’s consider something more passive.

So what are those investments? I’m glad you asked…

1. Growth Portfolio

Regardless of your age, your assets have to grow. One of the best ways to do that is to own equities. Some equities pay dividends, but that’s not the only reason you should own them. (For a complete understanding, read “What Is a Dividend?“)

The real equity story is growth. Keep in mind that I’m not saying now is the best time to own equities. It could be…but it also could be the worst time. It shouldn’t matter to you because most people, even seniors, have a very long-term investment horizon. You may not know it, but the truth is, you do.

Neal’s Notes:  If you want to super-charge your investment acumen, consider joining an investment club.  This can be a great way to learn the ins and outs of investing much faster.  The only thing is, do your do diligence before signing up.  Some clubs actually do more harm than good to it’s members.

I say this because once you retire, you need that portfolio to create the income. And you need that income for as long as you live – if not longer. If you’re thinking about what the market is going to do this week, month or year, you need to get your mind right. So…if you retire at 65, is it smart to put all your money in the bank? Sure…if you like eating cat food and working at Costco.

It may feel nice to have all your money in CDs, and you can try to justify it based on the fact that you are retired, but it makes no sense. Sorry. You’re probably going to live into your nineties, if not longer, so think long-term.

What is the right portfolio for you?

I can answer this question…but not in a post. It depends on your age, health, resources, needs and other goals and values. For our purposes here, please just use a strategy that makes sense in good and bad markets. Pick a portfolio strategy that you will stick with. The number one money-losing tactic I’ve ever seen is to switch strategies depending on market conditions. When the market is doing well and everyone is super excited, everyone wants a piece of the action. But this is usually the worst time to get aggressive.

Likewise, when the market is in the toilet, nobody wants to go near equity. And of course, that’s the best time to do so.

This is not to say that you should buy and hold. Certainly, that’s one strategy and it has its merits. I am personally not a fan of this method. I prefer to be more strategic (but even the approach I use, like all investment strategies, has it downsides).

The reality is, no matter what you invest in or what your portfolio consists of, there will be times when you underperform the market and/or lose money. But if your long-term goal is to have retirement assets that create income, growth needs to be part of that story.

Let’s consider another great way to create income.

2. Real Estate with a Twist

Every week someone asks me, “Should I refinance my mortgage and invest in real estate?” My answer is usually no, but I understand why people are interested.

Real estate is inexpensive now, and loan rates are low. That’s a perfect time to buy real estate if you ask me. In fact, I can’t think of better conditions. Am I saying real estate prices aren’t going to drop further? Nope. In fact, I’d really be surprised if they don’t drop further. But if we go back to our argument about the ultimate goal – having retirement assets that create good income – real estate has to be part of that conversation.

Again, you have to be very mindful about how you go about investing in real estate. There are still many markets – California among them – with overinflated prices. Here’s what I mean.

You can buy a house in Los Angeles for $500,000 and rent it out for maybe $2,000 a month. For this example, let’s say you buy that house for cash and the tenant pays all expenses. Let’s keep this very simple to illustrate the point. You will receive a total of $2,000 for 12 months or a total of $24,000 in rent. If you want to determine your return, you get 24/500 or 4.8%. This ignores tax benefits, depreciation, risks and upkeep.

Now, you could buy a house in another market (I won’t mention names) for $50,000 and rent it for $1,000 a month. The math on this one is beautiful. It works out to 24% and is a far better investment.

My point? If you happen to live in an overpriced market, look for partners you trust in better markets.

If you want to be very aggressive about growing retirement assets, you have additional options. Consider selling your home and downsizing or taking out a loan against your existing property and buying rentals in the right market (as I mentioned above). It’s not something I’d do unless my back was to the wall, but it is an option. No matter how smart something might be, I just don’t like owing money to anyone. But in the right situation, I don’t mind lending money out. That’s why Lending Club might be a good way to create retirement income (for more information, see my Lending Club review).

What about you? What retirement assets are you buying now? Why?