How can senior citizens earn more income?
That seems to be the $64,000 question these days. With incomes dropping dramatically after retirement-the median income for retirees age 54 to 74 being just more than $20,000-senior citizens need new investment strategies to help them make up the difference.
But how to do it? Relying on your Social Security benefits is not the answer. According to the Social Security Administration, filing and receiving your benefits is an important part of financial planning, but these benefits are not enough to retire on.
“For example, average wage-earners can expect Social Security benefits to replace 42 percent of their monthly income,” said Richard Rouse, deputy public affairs officer with the Social Security Administration in Chicago. “We always recommend that when you’re planning for retirement or are in retirement, you should have other investments.”
Many seniors tend to be conservative investors, but putting money in safe investments such as certificates of deposit isn’t the answer, either. In 1993, for example, the typical six-month CD paid an annual percentage yield of just 3.08 percent, according to Bank Rate Monitor, an industry newsletter.
Janet Kovanda, a certified financial planner and owner of Birmingham Financial Services in Westmont, maintains that retirees need to “change their current method of what they call investing, when what they’re really doing is only saving.”
“Most people who are retired are so used to investing in CDs that anything that doesn’t work or look like a CD scares them. But if they want more income, they’ve got to get into something a little more complicated than a CD. It doesn’t mean it’s not safe, it just has different characteristics.”
Here’s a few examples that can help you increase your income without giving up your retirement.
– Utility and telecommunication stocks and stock mutual funds. While most equities are vehicles to achieve capital appreciation, they can also provide steady income. Utility and telecommunication stocks, and in particular mutual funds that maintain only these types of companies in their portfolios, provide good income through payment of dividends, which are usually distributed on a quarterly basis.
Sometimes, if a company has had a particularly profitable year, extra dividends are paid to shareholders. The first thing you should do before investing in these stocks is to check out the payout rate, which is the percentage of earnings that is paid out in dividends.
Will Hobbs, a financial consultant at Robinson Humphrey Co. in Atlanta, advises checking in with a rating service before investing in a high-paying dividend stock.
“Services like Value Line will give you the information you need, such as if a company is going into default,” Hobbs said. “As for a payout rate, you’ll want to look into companies that have a rate of about 80 to 90 percent.”
But utility stocks have interest rate risk because utilities tend to borrow a lot of money. If rates rise, their cost of borrowing goes up. That hurts profits and, ultimately, dividends.
For those investors worried about the interest-rate sensitivity of a utility stock, check out the exploding telecommunications industry.
“You can get 3 to 4 percent income plus the growth of the stock,” Kovanda said. “They have more growth potential than gas and electric companies.”
– Laddering a bond portfolio. As an example of this strategy, Kovanda cites the 10-year bond ladder portfolio. This is a simple strategy that invests your money in bonds that are scheduled to mature continually over the years.
Here’s how it works: Let’s say you have $100,000 to invest. Take $10,000, or one-tenth of your money, and invest it in a 10-year bond. The next one-tenth will be invested in a nine-year bond, the next one-tenth in an eight-year bond and so on until your $100,000 is fully invested, which would be all the way down to a one year-bond.
The idea is to hold all of these bonds until maturity and then roll them over, once matured, into another 10-year bond.
“You’re always getting a long-term rate of return and you always have money coming due,” Kovanda added. “The key is not to liquidate and to hold until maturity.”
– Split-funded annuity. This conservative strategy uses two kinds of annuities: immediate and deferred.
Immediate annuities pay you a monthly check for life, based on the amount of money you put into the plan, our interest rate environment and your age. Deferred annuities let your cash grow, compounded and tax-deferred, until you decide how you want to withdraw your money.
Using a $100,000 example, you put $50,000 in a deferred annuity and $50,000 in an immediate annuity. The $50,000 deferred annuity sits there and grows in a tax-sheltered environment, compounding for as long as you want.
The $50,000 immediate annuity lets you receive monthly checks at a stated interest rate.
“This is a good method because you’re saving on taxes, it’s guaranteed by the insurance company, and it’s a conservative source of monthly income,” Kovanda said.
– Ginnie Maes and collateralized mortgage obligations. These investments are ways for an investor to receive the higher rates that people pay on their home mortgages.
Ginnie Mae is a nickname for the Government National Mortgage Association and the certificate is issued by this agency, which guarantees that you will receive timely principal and interest payments even if homeowners do not make mortgage payments on time. These pools of thousands of mortgages have been packaged for sale to individual investors either through the individual product or through a Ginnie Mae mutual fund.
CMOs are similar but can be riskier. They are separated into different maturity classes called tranches. CMOs are issued by the Federal Home Loan Mortgage Corp. and other issuers.
Both Ginnie Maes and CMOs are sold through brokerage houses. Both of these mortgage-backed securities pay slightly higher interest rates than on corresponding government bonds, but they can be a little tricky.
Why? If the mortgage rates in the pool of mortgages are dropping, people tend to refinance their mortgages. As they refinance, the principal is repaid early to the owners of the mortgage securities-the investors.
Kovanda cites this as a positive and not a negative. “People are saying negative things about them because of the prepayments, but it’s what makes the investment so attractive right now,” she said. “If an investor is investing in a short-term CD for a year at 3 percent, they could get a CMO earning 6 percent, but since it will probably prepay, they can get their money back in a year just as if they had invested in the CD.”
If interest rates rise, however, most people will not refinance, so investors will be locked in to the lower rate.
