Late last year, the Centers for Disease Control and Prevention released a report on life expectancy in the United States for 2019.
The report showed that life expectancy at age 65 for the U.S. population was 19.6 years. That fell to 19.1 years in the January-June period of last year, but it still means many who retire at the traditional age are facing almost two decades of living expenses to fund.
Investing wisely can help supplement Social Security benefits. Here are seven investments that could help retirees earn a decent return without taking on too much risk.
[Sign up for stock news with our Invested newsletter.]1. Real estate investment trusts.
Real estate investment trusts, or REITs, invest in mortgages or direct equity positions in various types of properties.
REITs are required to distribute 90% of their taxable income as dividends to their investors, and that yield is usually higher than what you can get from stock dividends. The combination of high dividends and the ability to develop properties or sell them and redeploy the money means these investment vehicles “can be a good total return investment for retirees as a portion of their portfolio,” says Michele Lee Fine, CEO of Cornerstone Wealth Advisory.
The largest REITs based in the U.S. are American Tower Corp. (ticker: AMT), which currently yields 2%, and Crown Castle International ( CCI), which yields 3% — compared with the current yield of the S&P 500 of 1.4%.
2. Dividend-paying stocks.
Stocks that pay dividends can offer relative stability in the often-tumultuous world of equities. These dividends are often higher than those from safer investments like certificates of deposit (CDs) and U.S. Treasury notes, especially now as interest rates are inching up but remain historically low.
While you still have to take on the risks associated with stocks, dividend payers also offer the chance to earn money simply by the stock price rising. With the combination of growth and income, these stocks can help you keep ahead of inflation.
“Companies with long track records of dividend payouts to investors every year through the worst market cycles, crashes and more, reflect a commitment to shareholders that can provide retirees greater peace of mind,” Fine says. The so-called ” dividend aristocrats” — members of the S&P 500 that have raised their dividends for at least 25 consecutive years — are some of the best dividend-paying stocks with the kind of solid track record on which retirees can rely. Consumer staples giant Procter & Gamble Co. ( PG), for example, has made uninterrupted payouts for more than 60 years.
3. Covered calls.
One way to lower risk with dividend-paying stocks is to write covered calls on them, says Laurie Itkin, a financial advisor and wealth manager at Coastwise Capital.
In the stock options market, a call is the right, but not the obligation, to buy or sell a stock at a specific price during a specified time frame. An investor who holds a stock can sell (also known as write) a call option above the stock’s current price to receive a premium payment. A covered call strategy works best when investors believe that the stock they’re holding won’t see sharply higher or lower prices.
With covered calls on dividend-paying stocks, investors can benefit from the call option premium in addition to capital appreciation and dividend income, Itkin says. “Writing covered calls on dividend-paying stocks is less risky than just purchasing dividend-paying stocks,” she adds.
4. Preferred stock.
Preferred stock is a stock-bond hybrid that pays a coupon well in excess of government bonds.
In the pecking order of who gets paid if a company goes bankrupt, preferred shareholders have priority before common stockholders but after bondholders. As long as a company stays financially healthy, this extra risk means bigger payouts to holders of preferred stock.
[SEE: 9 Best Municipal Bond Funds to Buy and Hold.]The high yields that preferred shares can offer for a retiree’s income stream make them “a desirable asset class for retirees seeking passive income,” Fine says. “It’s important to incorporate them into a diversified strategy to ensure it’s part of a suitable portfolio for one’s particular unique goals and objectives, risk tolerance and time horizon.”
5. Annuities.
Annuities are investment contracts between you and an insurance company. They come in different forms, and usually include a guaranteed return at a stated rate.
In addition to fixed annuities, there are also fixed indexed, variable, immediate and deferred annuities. “You can likely earn higher guaranteed interest rates on your retirement nest egg today in a fixed annuity than you can in a bank CD,” says Paul Tyler, chief marketing officer at Nassau Financial Group, which sells annuities.
Fixed annuities guarantee the principal invested, a minimum interest rate and set payouts for the life of the annuitant. It’s important to pay attention to the fees and commissions an annuity charges, which can be very high. Many annuities also have complicated features, so take the time to fully understand the product, and take a close look at how an annuity will change your tax liability.
6. Participating cash value whole life insurance.
The internal savings component of these policies compounds tax-deferred every year.
“Unlike bonds that get devalued as interest rates rise, cash value whole life is a superior asset class to hold in a rising rate environment as whole life dividends benefit from a parallel relationship with a rising interest rate,” Fine says. The value of these policies are guaranteed to increase every year, she adds.
Some of these policies pay dividends, similar to an investment like a mutual fund. Those yields are currently between 5.5% and 6%, Fine says, well in excess of the yield on the 10-year Treasury, which is currently around 1.7%. Keep in mind, though, that dividends usually aren’t guaranteed, and some companies have better track records than others of paying these on a regular basis.
If you want to tap into your cash value, you’ll typically have to pay interest and other fees to do so. This money also doesn’t pass on to your beneficiaries when you die.
7. Alternative investment funds.
Alternative funds can include options strategies, convertible bonds and merger arbitrage. “Put together, these strategies can have some of the same characteristics as bonds such as having a low correlation to stocks and having low overall volatility,” says Ryan Johnson, director of portfolio management and research with Buckingham Advisors.
Investing in mutual funds also allows for daily liquidity. Johnson’s firm has recently used the Calamos Market Neutral Income Fund ( CMNIX) and the Vivaldi Merger Arbitrage Fund ( VARBX).
With alternative investments, hiring an experienced, specialized mutual fund manager makes sense, Johnson says. That said, investors should keep in mind that fees for alternative investment funds can be higher than average because of extra administrative, trading or legal research fees, he adds.
