You’ve got bills to pay every month and you have to bring home the bacon if you want to stay current on your obligations. Got it. And because you have to pay your bills no matter what, you want guaranteed, safe income. It makes sense. But does that mean you should only buy investments that guarantee a fixed monthly income? Some people feel this way. In fact, here’s an email I received recently:
“I read that you do not like annuities…so what is a SAFE thing to do
when you need extra monthly income to come in and you have NO
retirement accounts or savings? If and when I sell my home I will need
that money to live on for the rest of my life. I am 65 now. PW”
PW asks an important question. And he’s right that I don’t like annuities for a slew of reasons. Rather than debate the pros and cons of annuities again, let’s take a hard look at what “safe income” really means. I believe that by doing so we’ll ultimately be able to find a better answer to PW’s question.
What Does “Safe” Mean To You?
I’m not trying to play word games with you. But “safe” means different things to different people. In fact, it could mean different things to the same person depending on how you ask and under what circumstances.
Let me give you an example. I’m sure all of us would agree that safe income is income that gets into our account as promised for as long as it is promised. Using that definition, some investors might opt for an annuity, CDs or bonds because they meet that criteria.
These types of investments provided a fixed return. That means once you get started, your monthly income check won’t change. But that’s not a solution my friend – that is the problem.
Because of inflation, the value of a dollar buys less and less each year. The average inflation rate is 3.2%. That means a dollar today will buy you 25% less in 10 years. So even if you keep getting the same income check for years and years you may wake up to find that you can’t live on the same money you used to be able to get by on. To me, that’s not safe. What do you call it when you lose 25% of your investment income buying power in 10 years?
Look at it this way. If PW invests his money and gets a “safe” income check every month, that’s wonderful. But if that income doesn’t beat or match inflation, he’ll go broke eventually – even though the checks will still come in. The income was secure – but the investor wasn’t.
Competing Definition for “Safe”
In my opinion, if you really want to talk about safety you need income that keeps coming in and is most likely to beat or match inflation for as long as possible. Using that definition, you’d probably lean towards using some equity in your retirement income portfolio. I say this because studies prove that this approach has historically worked best. Of course there are no guarantees that things will work in the future as they have in the past. So if your investment performance is particularly ugly and you withdrawal plan isn’t flexible, you could go broke going this route also.
Is There A Solution For Investors Who Want Safe Income?
Yes. There is always a solution – but it involves compromise. You have to figure out what’s most important to you and solve for that. For example, if PW is most interested in making sure he gets his check each month and is not willing to tolerate any capital fluctuation, he certainly should consider bonds, CDs and/or annuities. It’s just that if he goes this route, his long-term situation may become very tenuous because of inflation.
If he is most interested in reducing the odds of running out of money because of inflation, he will need to put up with market fluctuation and add equity to his retirement portfolio. It’s a “pick your poison” situation.
What it all boils down to is your focus. If you want your income to be secure – go with the fixed income alternatives. If you want to make yourself more secure, consider growth investments for at least a portion of your portfolio.
What do you consider safe income? Which way are you investing as a result?