A growing number of retirees are working in their senior years. Some are doing so by choice as it keeps them active and engaged, while others need the extra income.
But if you don't want to work after you retire, there are ways to generate income to supplement your Social Security benefits and retirement accounts. Here are two strategies to make regular income from your investments.
1. Owning dividend stocks
Dividends are payments that a stock distributes every quarter, but some pay them out monthly. They are a way to reward investors and generally offered by larger, more established companies that are often value stocks and have long track records of success and more liquidity than younger companies or growth stocks.
A key metric to look at when assessing a dividend stock is its yield, which is the percentage of the share price that's paid out in dividends each year. The higher the yield, the better — as long as it's not too high and not sustainable.
Generally, a good yield right now is in the 3% to 6% range. Anything higher could be a red flag that the company is paying out too much and won't be able to sustain it.
There are some exceptions, though, as some investment types — real estate investment trusts (REITs), for example — are required to pay out a higher percentage of earnings to dividends because they get tax breaks. Generally speaking, a payout ratio — the percentage of earnings that goes toward the dividend — in the 25% to 50% range is pretty good.
Let's say you took a portion of your retirement savings and put it into good dividend-generating stocks, like, for example. Walgreens Boots Alliance. Walgreens has a yield of 4.76%, a payout ratio of 38%, and has increased its dividend each year for the past 47 years. It currently pays out $0.48 per share each quarter at a share price of about $40 per share.
If you bought 1,250 shares at $40 per share — a total investment of $50,000 — you'd get $600 per quarter in income. And you'd still get the return that the stock generates for long-term capital.
2. Using a bond ladder
The second strategy, bond laddering, can go hand in hand with a dividend-investing strategy. Through bond laddering, you're buying bonds that mature at different dates over a period of time. If you build it correctly, you can generate income every month.
Say you have $60,000 to invest, once you hit retirement. You could take that money and invest $10,000 in six different bonds with different maturity dates — from one year out until six years out. As bonds typically pay out income semiannually, or twice a year, you could set up your ladder so that you get a coupon payment every month of the year.
The reason for different maturities is that it takes some of the interest-rate risk away. If you just bought six bonds with six-year maturities, you would be locked into the same yield. But with rolling maturities, once the one-year bond matures, you can take that initial capital and reinvest it in a new bond at the end of the ladder.
That way, if interest rates rose during that time, you'd get the higher yield. Of course, if rates went down, you'd get a lower yield, but you'd have higher yields from the others on the ladder. And keep in mind that the longer the maturity, the higher the yield.
It can be a little complicated to set up a proper bond ladder with the right type of fixed-income investments, so it's probably best to work with a financial advisor on building one.
Ultimately, whether or not you work in retirement will come down to how well you saved and invested over the years. If you don't have enough to live comfortably in retirement, you may need to work to supplement your income.
Another choice would be to reduce your expenses by downsizing your home and making money off the difference or moving to a cheaper part of the region or country. But these two investment strategies are simple ways to put your money to work in retirement.
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