Top 5 Retirement Income Investment Options

Are you excited to approach retirement? Maybe you’re looking forward to a long break after a career of hard work.

Unfortunately for many, retirement can also bring with it financial worries and unpredictability. How much should you be putting away for your golden years? And what should you do with that money?

One sound strategy is to put your money into financial products and securities that will pay you back a steady income in retirement. A good retirement income can help you feel comfortable that you aren’t going to burn through your savings too quickly.

How can you do that? Here are five investment options and products that can help you secure a healthy retirement income.

1. Annuities

Annuities are financial products sold by insurance companies. Essentially, an annuity is a contract between an individual and an insurance company: The individual pays a lump sum or series of payments, and in return, the insurance company agrees to make periodic payments to the individual, either immediately or at a future date.

Read more: Annuity 101: Retirement Income Basics

How an annuity works depends on what type of annuity it is:

• Immediate annuities. You buy these with a lump sum premium payment, and they start paying you back almost immediately.
• Deferred annuities. You buy these in a lump sum or with several payments over time. Your money earns interest and accumulates until you choose to annuitize at a future date.
• Fixed annuities. These are annuities that grow with a fixed minimum rate of interest—the interest rate you are credited never drops below that fixed minimum.

• Variable annuities. These annuities pay an interest rate that’s calculated based on the performance of investments that you choose. They’re more complicated than fixed annuities and riskier.

• Fixed Indexed Annuities. These combine features of fixed and variable annuities. The returns are tied to a market index, like the S&P 500, but they usually also have a guaranteed minimum interest rate—typically 0%. This means the return varies with the market performance but with a limited downside risk compared to variable annuities.

Benefits of buying annuities include:

• Guaranteed income stream. Many annuities offer the benefit of a guaranteed income stream, providing a sense of financial security in retirement.
• Tax-deferred growth. The funds in an annuity grow tax-deferred until they are withdrawn, potentially leading to greater compound growth.
• Flexibility in payout options. Annuities offer various payout options, including lifetime income, income for a certain period, or lump-sum withdrawals, providing flexibility based on retirement needs.

Some of the potential drawbacks of annuities could be:

• Fees and charges. Some annuities have high fees, including administrative fees, mortality and expense risk charges, and investment management fees, especially for variable annuities. However, not all annuity companies gouge you with fees: Canvas’ annuity products come with zero commissions, account charges, or fees.
• Surrender periods. Many annuities have surrender periods during which you can be charged a fee if you make withdrawals. However, some annuities are more flexible and have exceptions that let you take your money out more flexibly.
• Inflation considerations. The fixed income stream from an annuity may not keep pace with inflation, potentially reducing purchasing power over time. Again, this only applies to some annuities—others may be specifically structured to keep pace with inflation.

Annuities are powerful if your goal is financial security. They are the only financial products that can guarantee an income in retirement. And they can offer tax benefits and guaranteed growth of your nest egg to boot. They are a compelling way to boost the low-risk portion of your retirement portfolio.

2. Dividend-Paying Stocks

Dividend-paying stocks are ownership shares—stocks—in companies that return some of their profits to shareholders in the form of dividends. Dividend-paying companies reward investors with regular payouts.

For retirees, these stocks can serve a dual purpose: They offer a potential for passive income to supplement retirement funds while still allowing capital appreciation.

Some of the advantages of dividend stocks include:

• Potential for capital appreciation. While the primary allure of dividend-paying stocks is the income they offer, the stocks themselves can increase in value.
• Reinvesting dividends for compound growth. Dividends can be reinvested to purchase more shares of the stock, leading to compound growth.
• Historically stable income. Dividend-paying stocks, especially those from well-established companies with a record of profitability, are often fairly stable—they provide a predictable source of income.

On the other hand, there are some disadvantages of dividend-paying stocks to consider:

• Market volatility. The value of your stocks is subject to market fluctuations and the company’s performance. The value of the stock can go down, reducing the value of your assets and dividends.
• No guaranteed income. Dividends are not guaranteed. A company can reduce or eliminate dividends whenever it likes.
• Taxation of dividends. Depending on your tax bracket, the income from dividends might be subject to higher taxes than other forms of investment income.

3. Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are companies that own, finance, or manage income-producing real estate across a range of property sectors. They allow individual investors to buy shares in commercial or residential real estate portfolios, making it possible to essentially invest in property without buying it entirely yourself.

REITs can be beneficial because they offer a unique blend of real estate exposure and the liquidity of stock investments.

REITs operate by pooling the capital of numerous investors. A REIT's mode of operation is similar to a mutual fund for real estate, where the income generated from property rentals is distributed back to the investors. By law, REITs typically must pay out at least 90% of their taxable income to shareholders.

Some of the benefits of REITs include:

• Diversification. REITs provide diversification in a retirement portfolio, allowing you to easily invest in real estate without purchasing an entire property.
• Regular income. Due to their structure, REITs are required to pay out a majority of profits as dividends, which can provide a steady income stream for retirees.
• Potential for capital appreciation. Besides dividend income, REIT shares have the potential for capital appreciation. The value of real estate may increase over time, increasing the value of your REIT shares.

On the other hand, there are some drawbacks of REITs, including:

• Market fluctuations. Like all securities, the share price of REITs can be volatile and is subject to market fluctuations. During economic downturns, property values and occupancy rates may decline, which could lead to lower dividends and share values.
• Interest rate sensitivity. REITs are particularly sensitive to changes in interest rates. When interest rates rise, the financing costs for real estate increase, which can reduce the profitability of REITs and make them less attractive to investors. Additionally, as REITs often carry large amounts of debt, rising interest rates can lead to increased costs and decreased earnings.

4. Bonds and Bond Funds

In the landscape of retirement planning, bonds and bond funds can be useful for making up the low-risk portion of your portfolio.

Bonds are debt securities issued by entities like governments or corporations. The issuing entity promises to pay back your principal at a specific maturity date, along with periodic interest payments.

Bond funds are mutual funds or exchange-traded funds (ETFs) that pool money from many investors to buy a diversified portfolio of bonds. While individual bonds allow for a predictable income stream and return of capital at maturity, bond funds provide diversification and ease of trading but do not guarantee a fixed return or principal repayment at a specific time.

Both bonds and bond funds are typically seen as more conservative investments compared to stocks. The pros of bonds include:

• Regular interest payments. Bonds provide regular, predictable interest payments, often semi-annually.
• Preservation of principal. With individual bonds, as long as the bond is held to maturity and the issuer doesn’t default, investors can expect to receive their initial investment back.

Note that those pros apply to bonds, not bond funds. The pros of bond funds are similar to those of mutual funds.

While bonds can be useful, they also have some cons:

• Interest rate risk. Bond prices have an inverse relationship with interest rates. When interest rates rise, bond prices typically fall, and vice versa.
• Default risks for certain bonds. Government bonds are generally considered safe, but corporate bonds, especially high-yield (junk) bonds, can carry a significant risk of default. That means that the issuer may be unable to make interest or principal payments.

5. Mutual Funds

A mutual fund is an investment vehicle comprising a pool of funds collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. They are popular because they offer a way for retirees and those nearing retirement to gain exposure to a diverse range of assets with a single investment.

Some of the advantages of mutual funds include:

• Diversification benefits. One of the primary advantages of mutual funds is diversification. By pooling money from many investors, mutual funds can invest in a wide range of securities, reducing the risk that comes from investing in individual stocks or bonds.
• Professional management. Mutual funds are managed by professional fund managers who make investment decisions on behalf of investors. This expertise can be especially beneficial for retirees who may not have the desire or expertise to manage their own investment portfolios.
• Liquidity and flexibility. Mutual funds offer high liquidity—investors can buy or sell their shares of the fund at the current value on any business day. This provides flexibility for retirees who may need to adjust their investment strategy or access their funds.

Mutual funds have disadvantages, too:

• Management fees. One of the drawbacks of mutual funds is the management fees. These fees, along with other operating expenses, can vary widely and impact the net return on investment. It’s crucial to understand and compare these fees when selecting mutual funds.
• Potential for underperformance. While mutual funds are managed by professionals, there is no guarantee of superior performance. Some funds may underperform their benchmarks or the broader market due to various factors, including management decisions and the fund’s expense ratio.
• Market risks. Like any investment in the stock or bond markets, mutual funds are subject to market risks. The value of a mutual fund’s portfolio can go down depending on market conditions, which impacts the fund’s value and, consequently, the investor's retirement savings.

Secure Retirement Income for Financial Security

Each of the above options can help ensure that you continue to have some income after you stop working. Generally, experts recommend diversifying your portfolio so that you have some growth, but you also have some safety.

Read more: How to Create a Retirement Income Plan

Of all the investment options and products we mentioned, remember that only annuities can guarantee a retirement income. A fixed annuity offers you both the potential to safely grow your retirement savings and then guarantee you a retirement income for the rest of your life.

Talk to a licensed representative of Canvas Annuity to learn more about securing your retirement finances with a fixed annuity.