Investment Income Will Need to Last
People over the age of 55 today can expect to spend as many years in retirement as they did working. They will need a source of investment income that can keep pace with inflation over a 20, 30 or even 40 year time horizon.
Three Ways To Generate Investment Income
Investment income can be generated in many ways. Each of the three ways outlined below can be used on its own, or combined, to create either more investment income, or more capital preservation, depending on which is most important to you.
1. Build a Total Return Portfolio to Create Investment Income
The best way to create lasting investment income is to build an overall portfolio consisting of cash, fixed income and equities.
The cash and fixed income form the "safe" part of your portfolio. They will generate current investment income in the form of interest.
The equities form the growth portion of the portfolio, which allows your future investment income to increase with inflation.
There are capital preservation rules and withdrawal rules that need to be strictly followed when creating this type of portfolio.
For most people, creating an income producing portfolio, such as described above, is the best way to generate investment income that will last over a potentially long life expectancy.
This strategy is best for people:
- With long life expectancies.
- Who want to leave an inheritance.
- Who take a long term, unemotional approach to investing.
2. Investment Income Through Interest and Dividends
Another option would be to buy investments that pay consistent dividends or interest income.
Dividend income is paid by:
Interest income is paid by:
Dividend and interest producing investments are best used as part of a total return portfolio outlined in section 1 above.
If used on their own, these investments are best for people:
- Who do not want to spend any of their principal.
- Who have shorter life expectancies.
- Who may not need their investment income to keep pace with inflation.
3. Use a Contractual Guarantee to Create Investment Income
When you put your money in an annuity, the insurance company gives you a contractual guarantee to pay you a specific amount of investment income, on a set date, for the rest of your life.
Annuities are best used for people:
- Who are not concerned with leaving an inheritance.
- Who are single, or couples with no children.
- Who are willing to take less income and are okay with less control of their money in exchange for a fixed, guaranteed income.
- As part of an overall strategy that also includes a total portfolio and interest and dividend paying investments as described in section 1.
