No Pension? No Problem. Alternative Ways to Get Guaranteed Income

If you are lucky enough to have a pension, you can expect guaranteed income for the rest of your life after you retire. Unfortunately, fewer companies are offering pensions. The number of private pension plans has plunged 57 percent from 1975 to 2013. The good news is there are other ways to generate guaranteed income in retirement.  

“Having a combination of annuities in conjunction with low-cost stock index funds and a combination of different types of bonds or bond funds will provide a good healthy stream of income,” says Ara Oghoorian, financial adviser and founder of ACap Asset Management in Los Angeles.

1. Income Portfolio: Annuities

Oghoorian recommends an immediate or deferred annuity as one way to gain guaranteed income. An annuity is an insurance product and buyers make one lump-sum payment in exchange for guaranteed monthly income for life.  A buyer can choose to receive payments immediately (immediate annuity) or wait to receive payments at a future date (deferred annuity.) By waiting, a deferred annuity could be lower in cost and have a larger payout.  

Interest rates play a role in how insurers determine monthly payments.  In a low rate environment as we are in today, buyers may lock in lower payouts than if rates were higher.  For this reason, Oghoorian says he would not recommend putting a lot of money into annuities now.  He says about 10 percent maximum of a total portfolio for someone near retirement age should be adequate.

2. Income Portfolio: Stock Index Funds

To generate additional income, he says about 30 percent of that portfolio should be invested in low-cost stock index funds.  Oghoorian likes the SPDR S&P 500 ETF (NYSE:SPY) which tracks the S&P 500 Index and yields 2.1 percent.  Another pick is the SPDR DJIA ETF (NYSE:DIA) which follows the Dow Jones Industrial Average and yields 2.36 percent.  He says investors can watch these funds appreciate over time while still collecting a dividend payout.

3. Income Portfolio: Bonds

The remaining 60 percent of the portfolio for someone near retirement age should be in bonds according to Oghoorian.  He likes a combination of different types of bonds including short-term corporate bonds, Treasury Inflation-Protected Securities (TIPS) and high-yield corporate bonds.  These bonds together should make up 20 to 30 percent of the total bond portfolio.  Investors, he says, can get exposure to high-yield corporate bonds through the SPDR Barclays High Yield Bond ETF (NYSE:JNK).  TIPS can be purchased directly from the U.S. Treasury at treasurydirect.gov.

He recommends U.S. Treasuries for the remainder of the bond portfolio. Since interest rates are low, he prefers bonds with a short-term duration in the one to three year range.

4. Delay Social Security

Beyond setting up an income-generating investment portfolio, Steven Sass at the Center for Retirement Research at Boston College says holding off on Social Security benefits is another way to generate more income in retirement.  “It is a very attractive increase in your benefit if you delay to the point where it actually makes sense to use your savings to live on just in order to delay,” he says.

Sass says delaying benefits from age 62 to 66 can generate 33 percent more in monthly income.  Wait until age 70 and benefits could rise by 76 percent.  For example, if someone receives $1000 at age 62, they would be looking at $1330 if they waited to receive benefits at 66.  The payout climbs to $1760 if they delayed until age 70.

By waiting for the bigger payout, a large annuity payment may not be necessary and there is less need to worry about stock market and interest rate fluctuations.

To generate more income, Sass also recommends people near retirement age look for ways to cut fixed expenses including paying off their mortgage or downsizing.    

5. Real Estate

Real estate may be another way to generate more income in retirement. Oghoorian says if someone is able to buy real estate and rent it out, it not only brings in monthly income but it can serve as an inflation-hedge. The key is to avoid a mortgage and remember to set aside funds for repairs, maintenance and taxes.

To maximize rental income, buyers should look for properties in good condition that are located in neighborhoods with good school districts. Home prices near Whole Foods (NASDAQ:WFM) or Trader Joe’s stores tend to appreciate faster according to Zillow (NASDAQ:ZG).Buyers may want to consider finding an investment property near one of these stores since it could be an indicator of strong housing demand, making it easier to find renters as well.