The 8 Best Investment Options for Retirement Income

A steady, meaningful retirement income helps you maintain your quality of life after you stop working. Some of the most effective and safest retirement income options are annuities, retirement income funds, rental real estate, bonds, dividend-paying stocks, mutual and index funds, and CDs.

Almost half of all American adults worry that they’ll run out of money in retirement. This is especially true in today’s uncertain environment. But that doesn’t have to be you. If you plan well, you can live out your golden years worry-free. Do it by making good investment decisions and setting yourself up with products that guarantee retirement income.

There is no single best investment option for retirement income. The best option for you is the one that suits your preferences and goals. In this article, we describe the best product types for your retirement plan. We cover popular financial products and lifestyle strategies you can use to build up your savings.

1. Annuities

A retirement annuity is a little like a private pension. You make payments to an insurance company—premiums—which fund your annuity. Your annuity accumulates interest and grows over time. Then, when you enter retirement, you can annuitize it and begin to receive periodic distributions.

Annuities are good investments because they provide several important advantages:

• They provide a predictable source of income in retirement.
• They are low-risk. Fixed annuities provide guaranteed, steady growth that's uninfluenced by stock market fluctuations.
• They offer tax-advantaged growth.
• They provide flexibility in how you fund your annuity and how you receive payouts.
• You can use them to plan for your beneficiaries after you die.

Of course, like all financial products, annuities also have some disadvantages. These include:

• The guarantee of income is subject to the ability of the underlying insurance company to pay. That's why you always want to buy annuities from companies with strong financials.
• They have relatively low liquidity.
• Fixed annuities grow your retirement savings at a steady rate, but earnings may be lower for riskier investments.

Note that there are different kinds of annuities. The best one for you depends on your investment strategy.

Fixed annuities provide a guaranteed minimum interest rate so you can be sure that your funds will grow over time. They're low risk but they also have limited growth potential. Fixed-index annuities and variable annuities can provide higher rates of return but they're riskier and are subject to stock market volatility. You could even lose your money with variable annuities.

The best annuity for you depends on your retirement goals and risk tolerance.

2. Retirement Income Funds (RIFs)

Retirement income funds (RIFs) are a type of mutual fund. They're actively managed by an investment professional. RIFs automatically invest your money in a diversified portfolio—typically, large and mid-cap stocks and bonds. Their investment managers periodically rebalance the asset allocation so that it remains consistent with the stated investment goals of the fund.

Pros of a RIF include:

• They're usually fairly conservative and offer moderate growth potential.
• They're actively managed by an investment professional.
• They're liquid—you can access your money easily at any time.

Cons of a RIF include:

• You can expect your income and the value of your assets to fluctuate with the stock market.
• They don't offer a guaranteed fixed income as annuities do.
• There is usually a required minimum investment.
• You usually have to pay significant fees.

3. Rental Real Estate

Becoming a landlord in retirement might be a rewarding way to earn some extra income. This is especially useful if you already have some property that you can rent out. If you don't, you could choose to use some of your nest egg to buy a property for rental income.

Rental real estate can provide several benefits:

• The opportunity to invest in a tangible asset class.
• The potential for a regular income stream and cash flow.
• Tax-deductible expenses.
• The potential for your property values to appreciate over time.

The drawbacks of rental real estate income are:

• It takes time (and skill) to do it yourself. You could choose to hire a property management company, but those can be expensive.
• You need to have a significant amount of capital upfront.
• You could face significant expenses for maintenance.
• Tenants don’t always take care of your property.
• You must be familiar with the local real estate market.
• Real estate is not a very liquid asset class because it can be difficult to sell.
• It's somewhat uncertain because you may not be able to find suitable tenants.

4. Real Estate Investment Trusts (REITs)

Real estate investment trusts are publicly traded securities of companies that invest in real estate and produce rental income.

REITs are traded on the stock exchange, just like company shares. You can invest in REITs the same way as other companies: buy their stock, invest in REIT mutual funds, or buy REIT exchange-traded funds (ETFs). When you own a stake in a REIT, you receive a portion of the monthly rent that the company earns.

Pros of REITs for retirement investments:

• They require less capital than renting out your own property.
• They can help diversify your investment portfolio.
• Compared to real estate, REITs are relatively liquid.
• REITs tend to be much less volatile—and less risky—than many other kinds of stocks.

Cons of REITs for retirement investments:

• REITs do not provide a guaranteed income. If the REIT company does not make money, it won't pay you any earnings.
• REITs do not provide guaranteed growth, so they are a higher risk than annuities.
• REITs are not tax-free. You usually have to pay ordinary income taxes on REIT earnings.
• REITs are influenced by micro-changes in interest rates set by federal government monetary policy and other trends.

5. Bonds

A bond represents a loan made by an investor to a borrower. You can think of it as an I.O.U. that includes details of the loan and how the borrower will pay it back. Bonds are used by companies and governments to finance projects and operations. Owners of bonds are debtholders and the bond issuer is the entity that is in debt.

You can buy bonds directly from organizations or you can invest in a bond fund. Bond funds are pools of investor money that buy many different bonds.

Advantages of bonds:

• You receive a fixed rate of interest and your principal returns when the bond matures.
• As a rule, they are considered relatively low-risk investments. While a company or government’s risk varies, credit ratings can help you understand those risks.

Disadvantages of bonds:

• Bonds do not offer a guaranteed income and so may not meet the income needs of retirees.
• Investment returns are usually low.
• While some bonds can be bought with relatively little investment, others require larger investments and are inaccessible to some investors.
• Bondholders are more exposed to risk from changing interest rates.
• Bonds are less liquid compared to stocks.

6. Dividend-Paying Stocks

Some companies pay their stockholders dividends. All inventors who own a share of these companies will receive payment. This could be monthly, quarterly, or yearly. Investing in dividend-paying stocks is one way to earn income from investments.

Pros of Dividend-Paying Stocks:

• They provide a passive income stream.
• Many companies pay dividends reliably, which provides a regular income.
• Dividends help to protect against the market risk that comes with investing in stocks.

Cons of Dividend-Paying Stocks:

• It's mostly well-established companies that pay dividends and the stocks of these companies tend not to appreciate much in the short term.
• These stocks are usually fairly expensive to buy.
• Dividends are not a contractual duty and a firm may choose to reduce dividends at any time, so dividends are not a source of guaranteed income.

7. Mutual and Index Funds

Mutual funds allow investors with similar investment goals to pool their money in a fund that buys other securities. These funds are managed by professional portfolio managers. Investors share any income, expenses, gains, or losses in proportion to their shares.

Index funds are another category of investment funds. They invest in the companies included in a particular market index, like the S&P 500. These are passively managed, so they often have lower fees than mutual funds.

Advantages of mutual and index funds:

• They are an easy way to achieve a diversified portfolio.
• You can choose funds that match your risk tolerance. You can buy these funds inside of a traditional IRA, Roth IRA, or 401(k) for tax advantages.
• Index funds typically have relatively low fees.

Disadvantages of investment funds:

• Mutual funds can have significant fees.
• They can be fiscally inefficient because investors have no choice when they receive distributions and so cannot easily optimize their taxes.
• Even low-risk funds cannot offer guaranteed earnings.
• Neither mutual funds nor index funds offer guaranteed income like annuities do.

8. Savings Accounts and CDs

A savings account is a bank account that typically has very low-interest rates. Certificates of deposit (CDs) are another type of account that offer slightly higher interest rates, but they require that you leave your money in the account for a specified term.

Pros of saving accounts and CDs:

• They are very low risk.
• They offer guaranteed growth.
• Savings accounts are very liquid (CDs are less so).

Cons of Saving Accounts:

• The interest rates for savings accounts are very low. Rates are slightly higher for CDs but still not as high as for annuities.
• There are no tax advantages for savings accounts or CDs (unless they're held in a tax-advantaged retirement account).
• Some accounts have qualifying criteria for earning interest. These include a minimum account balance, a minimum periodic deposit, or limits on withdrawals.
• They do not provide guaranteed income.

Other Strategies You Can Use In Retirement

Looking for other personal finance strategies to augment your retirement savings? Here are some of our favorites.

Systematic Withdrawals

A systematic withdrawal is an automatic withdrawal from an investment account that occurs on a regular schedule. You can usually use them with mutual funds, IRAs, 401(k)s, and brokerage accounts. Planning your withdrawals can help you optimize your income to fall in a certain income tax bracket and avoid paying a higher tax rate than you need to.

Part-Time Work

Many people choose to continue working part-time in retirement. It can be rewarding and help you maintain an active social life. Plus, the additional income helps to supplement other income sources.

Delaying Social Security Benefits

Social Security provides most American retirees with a reliable source of income, but the amount it provides depends on a number of factors, including your age when you start to receive it. The longer you wait, the greater your benefit will be.

Downsizing

Finally, spend less by reducing your expenses. There are many ways you can do this. For example, you might consider downsizing to a smaller home, choosing a city with a lower cost of living, or choosing cheaper modes of transportation.

Creating a Diversified Retirement Plan ​

The safest retirement plan is one with diversified investments. Diversification helps ensure that you don't lose too much if one of your investment decisions proves to be unlucky.

For any diversified portfolio, and especially one for retirees, it's a good idea to include low-risk investments. Annuities are a great choice because they don’t only offer guaranteed growth, they are also the only financial product that can provide a guaranteed income for the rest of your life. They can help you feel confident that you won't run out of money in retirement.

Canvas Annuity provides fixed annuities with guaranteed minimum crediting rates over the annuity's term. Apply today to add one to your portfolio.