Retirement Reinvented: Exploring Post-Retirement Investment Opportunities

With longer life expectancies, your retirement savings may need to last 20 years or more. It's important to have a clear plan for how you can afford to live on a fixed income and understand where and how your cash is invested.

- High-yield savings accounts

- Low-risk investments such as short-term bonds and Treasury Inflation-Protected Securities (TIPS)

- Stocks and bonds

- Real estate rentals

- Certificates of Deposit

- Alternatives to cash, such as money market accounts or high-yield savings accounts

High-yield savings accounts

One of the main benefits of high-yield savings accounts is that they offer interest rates well above the national average. As of July 2024, the national average APY for a traditional savings account is 0.45%, while some high-yield savings accounts offer rates as high as 5%. This means that your savings will grow faster in a high-yield account.

Another advantage is security. Most high-yield savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), which means that your deposits are protected up to a certain limit (typically $250,000) per depositor, per institution. This gives you an extra sense of security for your savings.

When choosing a high-yield savings account, it's important to shop around for the best rates and consider the requirements for opening an account, such as minimum deposit amounts and monthly fees. You should also think about how accessible you want your funds to be and whether you prefer online or in-person banking.

Some popular high-yield savings accounts to consider include:

• UFB Direct: 5.25% APY, no minimum deposit requirement, and zero monthly fees
• Credit Karma Money Save: 5.10% APY, no minimum deposit requirement or monthly fees, and FDIC insurance coverage of up to $5 million
• Varo Bank: 5.00% APY with qualifying direct deposits or a positive balance in both Varo bank and savings accounts
• My Banking Direct: 5.45% APY, no monthly fee, and only $1 needed to earn the APY

Low-risk investments

High-yield savings accounts

While not technically an investment, high-yield savings accounts offer a modest return on your money, and they are completely safe as you will never lose money. Most accounts are government-insured, so you are protected even if the financial institution fails. However, inflation can erode the purchasing power of your savings over time.

Money market funds

Money market funds are pools of certificates of deposit (CDs), short-term bonds, and other low-risk investments. They are typically sold by brokerage firms and mutual fund companies and offer diversification to reduce risk. Money market funds are liquid, allowing you to withdraw your funds at any time without penalties. They usually offer a stable, low-risk option for your cash.

Short-term certificates of deposit (CDs)

Bank CDs are loss-proof in FDIC-backed accounts, as long as you don't withdraw your money early. With interest rates rising, short-term CDs can be a good option, allowing you to reinvest at higher rates later. Avoid long-term CDs to minimise the risk of being locked into below-market rates. No-penalty CDs are a good alternative if you think you might need to access your funds early.

Series I savings bonds

Series I savings bonds are a type of low-risk bond that adjusts for inflation, protecting your investment. When inflation rises, the bond's interest rate is adjusted upwards, and when inflation falls, the payment falls. This type of bond is backed by the US government and can be purchased from TreasuryDirect.gov.

Treasury bills, notes, bonds, and TIPS

The US Treasury offers a range of low-risk investment options, including Treasury bills, notes, and bonds, as well as Treasury inflation-protected securities (TIPS). These are highly liquid securities that can be bought and sold directly or through mutual funds. While they are generally safe if held until maturity, selling them early could result in a loss of principal if interest rates have risen.

Dividend-paying stocks

While stocks are generally riskier than cash or government debt, dividend-paying stocks are considered safer than high-growth stocks. These stocks pay cash dividends, providing regular income and potentially reducing volatility. Dividend-paying companies tend to be more stable and mature, and they offer the possibility of stock price appreciation as well. However, there is a risk that the company could cut or eliminate dividends during tough times, hurting the stock price.

Stocks and bonds

Stocks

Investing in the stock market is a great way to preserve capital and create supplemental income. Historically, stocks have outperformed every other asset class over the long term. From 1928 to 2018, stocks returned an average of 11% per year, compared to 6% for bonds and 3% for cash.

The stock market offers versatility, allowing retirees to preserve capital through safe retirement stocks that provide a steady stream of dividends or learn swing trading or day trading to bring in extra income. Additionally, diversifying your portfolio across multiple companies and industries can help mitigate the risks associated with stocks.

Bonds

Bonds are considered a safer investment option and are ideal for retirees looking to preserve capital while generating income. Government and high-quality corporate bonds provide regular interest payments and return the principal upon maturity, offering a predictable income stream to cover living expenses.

Bonds can also act as a buffer against stock market volatility, providing a more stable investment environment during uncertain economic times.

Creating a Balanced Portfolio

When considering where to allocate your retirement money, it's essential to find a balance between riskier assets with high returns and safer, more reliable assets. The ideal retirement asset allocation typically includes equities for growth, bonds for income and stability, and real estate or commodities for inflation protection.

A general guideline suggests that 5-30% of your portfolio should be in cash, 35-50% in bonds, and the remaining 20-60% in stocks. However, the specific breakdown depends on your monthly expenses and the total capital you have saved.

Real estate rentals

Advantages of Real Estate Rentals for Retirement Income

Rental properties can provide a steady stream of income that continues throughout retirement, unlike stocks or bonds with fluctuating dividends and volatile values. Real estate investments also have the potential to appreciate over time, allowing investors to build equity and increase their net worth. Additionally, real estate investors can take advantage of various tax deductions, such as repairs, maintenance, mortgage interest, property taxes, and depreciation, to reduce taxable net income.

Another benefit of real estate rentals is the power of leverage. By taking out a mortgage, investors can purchase more properties with less upfront capital. Leverage can also increase the cash-on-cash return, which is a metric that measures the annual return on investment based on the amount of cash invested. For example, if an investor purchases a rental property for $250,000 and generates $20,000 in cash flow per year after expenses, the cash-on-cash return would be 8%.

Real estate investing for retirement also offers a degree of control over returns and risk mitigation. Investors can renovate properties, screen tenants, and proactively manage properties to optimize returns and minimize risks. Additionally, real estate retirement income comes with favourable tax advantages, such as deductions for insurance, property taxes, property management fees, rental application screening costs, and mortgage interest.

Disadvantages of Real Estate Rentals for Retirement Income

One of the main disadvantages of real estate rentals for retirement income is the substantial barrier to entry in the form of knowledge and skill. Investing in rental properties requires a deep understanding of various aspects, such as calculating rental cash flow, finding good deals, financing properties, screening tenants, and managing tenants. It also requires a significant amount of labour and work, especially in finding good deals and managing properties.

Another downside is the high minimum cash investment required for rental properties. Taking out a mortgage for a rental property typically requires a down payment of 20-30%, which can be a significant financial burden. Additionally, real estate is infamously illiquid, making it challenging to convert investments back into cash quickly.

Rules of Thumb for Buying Rental Properties for Retirement Income

• Buy before you retire: Mortgage lending guidelines have become stricter, and banks typically require two years of employment history and a substantial down payment for rental properties.
• Consider living in the property for one year: Owner-occupied properties may qualify for more favourable mortgage terms.
• Build a savings reserve: Set aside enough funds to cover monthly expenses and potential repairs.
• Purchase good properties and get help from an expert: Work with a local realtor to understand the average rents and demand for housing in the area.
• Calculate your income generated: Aim for a return of 6% to 8% per year of the total value of your property.

In conclusion, real estate rentals can be a viable option for generating retirement income. However, it is important to carefully consider the advantages and disadvantages and follow the rules of thumb to make informed investment decisions.

Tax-efficiency

When it comes to investing after retirement, there are a number of tax-efficient strategies you can employ to minimise your tax burden and make the most of your investments. Here are some key considerations:

Tax-efficient accounts

Retirement accounts like 401(k)s, traditional IRAs, Roth IRAs, and Health Savings Accounts (HSAs) can provide significant tax benefits. 401(k)s and traditional IRAs offer tax-deferred growth, meaning you pay taxes on distributions in the future. Roth IRAs and Roth 401(k)s, on the other hand, are tax-exempt, allowing tax-free growth and distributions. HSAs, designed for those with high-deductible health plans, offer triple tax advantages: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. Additionally, consider investing in 529 plans for tax-advantaged education expenses or moving to a tax-friendly state with low or no income taxes.

Tax-efficient investments

Municipal bonds are generally exempt from federal taxes and, if purchased in your state of residence, may also be exempt from state and local taxes. Treasury bonds are exempt from state and local income taxes but are taxed at the federal level. Municipal and Treasury bonds are best held in taxable brokerage accounts. Mutual funds, while offering diversified investments, can trigger taxable capital gains. Instead, consider passively managed mutual funds, index funds, or exchange-traded funds (ETFs) which tend to be more tax-efficient due to lower turnover.

Tax-efficient strategies

Consider the length of time you hold an investment and the resulting capital gains taxes. Short-term capital gains, from selling investments held for a year or less, are taxed at higher ordinary income tax rates. Long-term capital gains, from selling after a year or more, are taxed at lower rates of 0%, 15%, or 20%, depending on income. Tax-loss harvesting, or selling losing investments, can help offset these capital gains. Additionally, donating appreciated securities to charity can provide tax deductions and avoid taxes on capital gains.

Consult professionals

If you're feeling overwhelmed, consider consulting financial advisors and tax advisors. They can provide personalised advice and ensure you're making the most tax-efficient decisions for your investments.

Frequently asked questions