You are not alone. We hear similar questions from many retirees who want to live off interest and preserve as much of their assets as possible. Although short-term rates remain at historically low levels, you do have options.
But first I want to emphasize a few fundamental but important points. Before making investment choices, you need to have a good handle on your expenses, both discretionary (nice to haves) and essentials (can’t live without). Once you really understand your expenses, you should match your income sources against each type of expense. Specifically, your guaranteed, predictable income sources should cover your essential expenses. These income sources include Social Security, pensions, and guaranteed annuity income. Your discretionary expenses could be covered by other sources of income, such as part-time work, rental income, and periodic withdrawals from various accounts. Also, be sure to have a good understanding of key retirement risks, such as longevity, inflation, and rising health care costs. In other words, make sure you have a retirement income plan. We can help you put one together if you haven’t done so already.
Once you have a firm grasp of your expenses and how you’re going to cover them, you might consider the following investment types:
o High quality dividend-paying stocks
o Fixed and variable income annuities
o Bond mutual funds and ETFs
Our fund managers often say “Beware of chasing yield” when looking for dividend-paying stocks. In other words, look forward, not backwards. Focus on finding companies that are well-positioned to grow their dividends in the future, rather than those who have paid healthy dividends in the past. This may require a lot of research, which is available on Fidelity.com. Or, you could use the services of a professional portfolio manager.
Income annuities are essentially a contract with an insurance company: you make a lump-sum purchase in exchange for a guaranteed stream of lifetime income. Annuities come in different flavors: some offer fixed rates, some are variable (meaning the payments may fluctuate with the underlying investments), and some offer a form of cost-of-living adjustment (COLA).
Third on the short list are bond mutual funds: professionally managed portfolios of individual bonds. With them, not only do you get the potential benefit of a professional portfolio manager, you also have the flexibility to choose different types of bond funds, such as international, U.S. Government, and corporate. You can also make choices about credit quality and duration. For more information, take a look at our bond fund overview on Fidelity.com: https://www.fidelity.com/mutual-fun...
Just be sure to start with your retirement income plan. If you don’t have one, or simply want to get a second opinion on the plan you have now, please give us a call. We’d be delighted to help.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
INVESTING IN A VARIABLE ANNUITY INVOLVES RISK OF LOSS.