4 Ways to Generate Income Before and After Retirement
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Generating income both before and after retirement is more important than ever. Expenses like healthcare, housing, and everyday needs all take a huge bite out of even the most robust savings over the years.
Kimmie Green, a money expert who spoke with CNBC, recommends having eight times your annual salary saved by retirement. If you want to truly enjoy your retirement years and live free from money worries, you need to find ways to generate income once you’ve stopped working. Here are four ways to keep the money flowing in – without working.
1. Laddered Bonds
Bonds are fairly risk-free investments that could boost your income for years.
When a company or other entity wants to expand, refinance debt or simply continue operations, it may turn to individual investors rather than banks. The company issues a bond with a prearranged interest rate. By a certain date, the principal must be repaid to the investor. That’s called the maturity date. Many bonds are set to mature at 20 or 30 years.
Meanwhile, the bondholder receives the interest amount, or coupon rate, semiannually.
Here are some advantages of bonds:
- Bonds usually pay higher interest rates than other savings instruments.
- Returns on investment are fixed. You always know what you’re going to get.
- Bonds are safer than stocks.
- Value may fluctuate with interest, inflation rates or the credit standing of the issuing entity, but bonds are still more stable than stocks.
- If you keep a bond until it matures, it could be worth significantly more than what you paid for it. You’re guaranteed at least face value.
- Bondholders are paid first if a company must liquidate assets.
Building a bond ladder is smart. According to Investopedia, that’s a portfolio in which several small bonds have shorter, slightly different maturity dates. The idea is to stagger them evenly over several months or years for increased liquidity and diversity. As each bond matures, it can be reinvested or sold when interest rates are favorable.
2. Stock Dividend Income
A stock dividend is a payment made to a company’s shareholders in additional shares rather than cash. For example, the company might pay a dividend of 0.05 shares of stock for each share owned. If you owned 3,000 shares, you’d pick up an additional 150. Companies usually pay in shares when they need purchasing power or are impacted by an external financial crisis.
Don’t knock it until you’ve tried it. Bill Gates is where he is today because 100 shares of Microsoft multiplied to 28,800 shares over 25 years. Many of his shareholders and employees who bought in early on became multimillionaires.
Stock dividends have other benefits, including:
- Shareholders have a choice. They can hang on to their shares and watch their value increase, sell the shares for quick cash or sell them and reinvest them.
- As long as you keep the shares, they are untaxed.
- Stock dividends are reported as capital gains rather than income. In some jurisdictions, you could pay 50 percent less tax. If you keep the shares until retirement, you’ll get even deeper tax discounts when you sell them as a senior.
The only real disadvantage of stock dividends is the possibility of the company becoming unprofitable or failing altogether. If you’re willing to assume that risk, stock dividends can pay off handsomely.
Fixed annuities provide a steady stream of supplemental income for investors who get nervous in fluctuating markets. They’re like CDs, but are issued by insurance companies, not banks. They pay guaranteed rates of interest that are usually higher than those paid on CDs.
With a fixed annuity, you deposit funds with an insurer who agrees to pay a specified interest rate over a specified time period. The interest you earn isn’t taxed until you withdraw the money. If you do that before age 59 ½, you’ll pay the tax and a high surrender penalty. Insurers also tack on sizable fees for early withdrawals.
With a variable annuity, the insurance company offers a group of mutual funds in a tax-deferred annuity. You can choose the funds in which you want to invest, and you pay a premium to the insurer to operate the portfolio. Insurance costs and investment management fees make variable annuities expensive to run.
Your principal is more secure in a fixed annuity, but it has limited potential. A variable annuity is riskier because the value of your investment is impacted by the ups and downs of the market, but you could see high-yield results.
4. Switch to a High-Yield Savings Account
Put your money to work making money. Opening a high-yield savings account is one of the best ways to accumulate interest, according to Money Inc, while knowing your money is within reach if you need it. Bank accounts are insured by the FDIC for up to $250,000, and credit union accounts insured by the National Credit Union Share Insurance Fund are equally safe.
Passive income isn't especially exciting until the interest starts rolling in. If you get the best rate possible and interest is compounded, earnings will start to generate earnings – and they add up fast.
Be sure to weigh the interest rate against fees. Some institutions charge fees for setting up accounts. Some charge for every transaction over a set number per month. It's definitely in your best interest to ask about withdrawal fees.
In short, a lower interest rate with fewer fees could be more affordable and profitable.
Learn More About Income-Generating Strategies
Your financial circumstances are as unique as you are. And when you’re facing a long, happy retirement, you need to make certain your income will continue to roll in without you having to worry about money, expenses, or working. Using these income-generation methods can ensure you’re comfortable for years.
But you need to do your homework before your retirement arrives. Carefully research the various strategies presented here, and look for a trusted adviser for even more options. Search online to compare different investment benefits and opportunities. And don’t forget to make sure you know which investments will generate long-term cash.
Like anything, it's always a good idea to be aware of the latest research. We recommend comparing at least 3 or 4 options before making a final decision. Doing a search online is typically the quickest, most thorough way to discover all the pros and cons you need to keep in mind.