When we are near or in retirement, we have exited the Accumulation Phase and entered the Distribution Phase. No longer are we working and making contributions to retirement plans; instead, we are withdrawing against our retirement savings to create income. Remember that RMDs (Required Minimum Distributions) will force us to begin withdrawals no later than our mid-seventies. The game has changed. Growth takes a back seat to asset preservation and income creation. Our goal should be to protect principal and create income. How can we create income? Utilize a multi-faceted strategy of different assets to produce a regular (monthly) stream of income. At Gulf Financial, we call this the Income Engine. If you are looking to create income while also protecting principal, consider adding some of the following investments to your portfolio.
Long Term CDs
We still see 2-year CDs paying near 4%. Remember when buying CDs, that rates are dropping, so buy the longest CD available. Money Markets and short CDs will start to drop in the near term as the Fed begins a rate reduction cycle, so buy CDs now for the best rates (the longer the better).
Bonds
We like Florida municipal bonds for non-retirement accounts as they are State and Federal tax-free. Florida Municipal Bonds are yielding around 5% as of this writing. That’s a great rate and no taxes. Try to buy individual bonds rather than bonds in an ETF or Mutual Fund. Investment-grade corporate bonds are a good choice for retirement accounts. Consider laddering bond maturities to increase liquidity and reduce interest rate risk. Annual (after fee) yield for corporate bonds in the current rate environment is approaching 6%. Bonds historically perform well in a falling interest rate environment. We may be at the beginning of a rate decrease cycle, creating favorable conditions for bonds.
Annuities
Fixed interest rates are falling from generational highs. However, annuity rates are still very good. Consider locking in some of the great rates while they are available. Here at Gulf Financial, we utilize two types of annuity structures only, Fixed and Fixed index annuities. Fixed annuities are very much like CDs in that they pay a guaranteed yearly interest rate. The early withdrawal terms are a bit more restrictive, but rates are currently approaching 6%. This type of annuity is called a MYGA (Multi Year Guaranteed Annuity). The other type of annuity we regularly use in client portfolios is the Fixed Index. Fixed Index annuities offer the opportunity for higher growth without market risk. Fixed Index annuities can be purchased with an income rider that offers permanent lifetime Income just like a pension. It is a great way to supplement social security and increase permanent monthly income. Remember, when buying annuities, limit your exposure to 30% or less of total assets. Annuities are not very liquid and carry extensive surrender penalties when withdrawn early. Always use A-rated carriers only.
Structured Notes
Structured income notes are a relatively new investment that has gained in popularity over the last 5 years. Structured income notes generate a monthly payment to client accounts and have a fixed coupon (annual interest rate). These notes have a moderately conservative risk profile and can create annual incomes in excess of 10% after fees. Structured Notes are also available in a principal-protected version that allows for a share of market upside with no downside market risk. Integrating notes into your portfolio can decrease overall market risk and increase your yield. Structured Notes can seem a little complex to the average investor, so seek out a fiduciary advisor who can show you how they work. Don’t miss out on this top income solution.
Dividend Stocks
Another stalwart of the Gulf Financial income strategy is the dividend stock basket. We carefully select large cap US corporations with a long history of paying dividends and buy the individual stock for client accounts. As stockholders, they are then entitled to the quarterly dividend. Owning individual stocks is a great way to achieve both long-term growth and short-term income. Buy dividend stocks for your non-retirement accounts, live off the dividends, and pass the stock along to heirs TAX FREE.
REITs (Real Estate Investment Trusts)
A REIT is a security that allows the holder to participate in a stream of income, generally from rents of commercial or residential real estate. Take caution when utilizing this option, as some REITs can have a significant risk of loss as well as time restrictions on selling.
Covered Calls
Selling options on owned securities is a high-income generator, albeit with significant market risk. We do see after-fee income in the Gulf Financial covered call strategy in excess of 9%.
In summary, creating income and securing principal requires a number of different investments working together to produce regular income at a low risk profile. We call it the Gulf Financial Income Engine. To find out more, call (833) 403-4041 or visit GulfFinancialGroup.com
All investing involves risk of loss. Please consult with a tax and investment advisor prior to making any decisions.
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