The Best Retirement Income Investments

05/03/2022

You have worked hard for your money. Now it is time to enjoy it. Finding the best investments for income in retirement will be paramount to your success. Even with an investment portfolio review, making your money last won't be easy. At age 60, men and women can expect to live another 22 and 25 years, respectively. These statistics highlight the jarring reality that retirees will most likely need to sustain income for decades. Reaching retirement is a significant milestone and also a time of powerful financial and investment changes. One of those changes is converting your growth portfolio into an income portfolio. So, what are the best investments for income in retirement?

The best investments for income in retirement should help you create sustainable income for the rest of your life. Your investments should also help you maintain financial security. To accomplish these goals, you'll need to construct an investment portfolio with different investments, each working to complement the other. Unfortunately, there is no single investment that will solve your retirement income problems. After helping expats invest for nearly twelve years, we know this from experience. The good news is that once you know what you are trying to accomplish, finding the best investments gets a little easier. While every situation is different, each investment you select should serve as a building block to improve your overall portfolio in the five areas below:

  • Risk
  • Return
  • Cost
  • Taxes
  • Income

For example, ask yourself the following questions:

  • How does the investment I am considering help me better manage the risk in my portfolio?
  • How does the investment I am considering help me get the returns I need?
  • How does the investment help reduce my costs?
  • Is the investment tax efficient?
  • How does the investment help my portfolio create the income I need to maintain my lifestyle?

Remember, no investment is perfect for all situations. But when combined together, the best investments for income in retirement should create a total portfolio that helps you create sustainable income for life.

Understanding Diversification

In your working years, growing your portfolio may be a primary concern. But when you retire, your attention often turns toward reducing risk and making your money last. That's where portfolio diversification comes into play. Diversification is one of the most critical elements of an investment strategy. It is a foundational building block of any investment plan. Whether you are a novice investor or in your retirement prime, diversification is a mainstay for any long-term portfolio. So, when picking investments for retirement, diversification is a telling factor. Why does diversification hold so much value? Diversification seeks to manage your portfolio's exposure to risk and has the potential to increase your portfolio's efficiency. An efficient portfolio has the potential to do two main things:

  • Increase expected returns
  • Reduce fluctuations in overall portfolio value

While not guaranteed, proper use of diversification may accomplish these two objectives relative to a portfolio that is not adequately diversified. For example, did you know that all stocks from 1994 to 2020 had a compounded average annual return of 8.2% per year? However, if you exclude the top 25% of performers each year the return drops to -4.7%! That's why diversification matters. If you aren't diversified enough, evidence suggests that there is a high probability that you can end up owning the worst performers. When it comes to diversifying your investments for income in retirement, remember that your fundamental risk is having too much exposure to a single investment. Before retirement, you have time to make financial adjustments or work a little longer if something happens. Our golden years don't offer the same flexibility.

What factors make a portfolio diversified?

There are many factors that contribute to a well-diversified portfolio including:

  • number of holdings
  • Exposure toward stocks, fixed income bonds, real estate, or guaranteed income sources
  • Exposure toward value companies and growth companies
  • Exposure toward large and small companies
  • Exposure to guaranteed income sources such as pensions or social security.

In practice, the best investments for income in retirement should contribute toward your overall game plan. When it comes to creating a retirement income portfolio, the sum of the parts is always more powerful than the individual components by themselves. In practice, we believe a diversified portfolio should contain thousands of stocks and bonds across many industries and sectors. Owning just a handful of stocks simply doesn't cut it. You can achieve a diversified portfolio by being deliberate in your asset allocation (mix of investments) and selecting a mix of mutual funds, exchange-traded funds (ETFs), fixed income bonds and stocks. Remember, your asset allocation should also consider your retirement age, risk tolerance, and retirement goals.

Go global

You should also pay particular attention to geographic diversification. International diversification should always be considered when selecting the best investments for retirement income. Why? Investors have a well-documented tendency to heavily invest in companies that are geographically close to them. This habit is called home-country bias. Unfortunately, "home bias" is as harmful to your retirement income portfolio as concentrating too much in any one industry or sector from a risk perspective. To consider how undiverse a portfolio composed primarily of investments in Europe is, just consider the size of the non-European equity market. We mean the best investments for income in retirement may also be located beyond European borders. Remember, too, that the power behind diversification lies in how the investments relate to each other when creating a complete portfolio. When one investment lags, will there be another investment in the portfolio to pick up the slack?

If all of your investments are going up at the same time, by definition, you aren't diversified! When one investment "Zigs" the other should "Zag". 

The point here isn't to try and guess which investment will outperform another in a given year-you simply can't. The point is to remember proper diversification and to hold broad exposure to many parts of the global economy. Now that you have a firm understanding of why diversification is so important in retirement, let's talk about tax efficiency.

Double Down on Tax Efficiency

When it comes to choosing the best investments for retirement income, don't forget about taxes! Once you reach retirement, managing your taxes is one of the best ways to get more out of your savings and increase their longevity. The investments you select, your withdrawal plan, and even timing strategic decisions or tax-loss harvesting can all affect how much you will owe in income taxes. The secret? Keep taxes top of mind from beginning to end. Proactive tax planning is all about balance, so try to keep a multi-year perspective because sometimes it makes sense to increase your taxes one year to reduce them even more, the next. Your retirement income plan should consider tax-efficient investments. After all, it is how much you earn on an after-tax basis that determines your true return in the first place! 

How The Best Retirement Investments Fit Together

Unfortunately, it's not enough to simply select the best retirement investments to create income in retirement. Your investments should be part of an overall asset allocation that matches your risk tolerance, income needs, return objectives, and tax situation. Your asset allocation is the most important factor when building a portfolio for retirement. Don't just focus on chasing the investment that provides the most cash flow or the highest yield. When creating income in retirement, we prefer a total return approach. Total return investing places greater emphasis on diversification than investing strictly for yield. Income is generated from capital gains, dividends, and interest rather than just dividends or interest alone. The result is a retirement portfolio that has greater potential to make your money last longer in retirement. We believe that a total return approach is superior to seeking investments that strictly focus on maximum yield. Ultimately, chasing high yield investments alone can leave you undiversified, expose you to unnecessary and inefficient risks, and increase the taxation on your retirement income.

Conclusion

Choosing the best investments for income in retirement is a meticulous and comprehensive process. Before you choose any investments, you should determine the right asset allocation for you. This starts with assessing your risk tolerance, income needs, and spending requirements going forward. Investing for income in retirement is about finding the right balance. A total return approach that incorporates a diversified mix of index ETFs, fixed income bonds, real estate investments, and dividend-paying value stocks, and small company stocks is an excellent way to sustain your income and protect your principal for the long term. But, it's not the only way and every situation is different. With every moving piece, and as vital as it is to get it right, it's worth having a qualified professional help you. 

At expatwealthatwork, we are retirement financial advisors who have the knowledge and experience to identify opportunities to reduce your risk, build and maintain a diversified portfolio, and manage your distributions in the most tax-efficient way possible.

We can help you find the best investments for retirement, put together a plan, and manage it as you go, so you can focus on living in retirement. Do you need help selecting and managing the best investments for income in retirement? We would be glad to help you with your own investment plan. Contact us today to get started: info@expatwealthatwork.com