Social Security is not enough: How to set up alternative retirement income

James Royal, Ph.D., on

Published in Business News

—Current income now: If you need the highest current income today — if you’re a retiree now, for example — you can invest in income-paying securities such as bonds, bond ETFs and preferred stocks. In exchange for more yield today, you’ll be sacrificing growth later, but it can be worth the trade-off if you’re really under pressure for income.

—Growing income for later: If you can afford to wait for income, you can potentially grow your income much more while even having more wealth. This approach works well with dividend-paying stocks and S&P 500 funds, where yields are lower today but should grow over time. This approach likely leads to more total wealth for you.

But it’s critical that you understand how taxes affect these strategies. Whenever you receive income such as dividends or interest, you’ll owe tax on that income unless it’s received inside a tax-advantaged account. On the other hand, if you focus on income for later, you may be able to grow your wealth without having to pay taxes on much of your gains, even in a taxable account.

“It’s crucial that you talk with your tax preparer along with your financial professional as you determine your retirement income plan to ensure you have an eye on the tax implications of your various income streams,” says Bond.

Here are five key securities for setting up your alternative income stream.


Bonds are the classic example of an “income now” strategy. Your total return for a bond is typically the interest rate paid by the bond’s issuer, and when the bond matures you’ll get your principal back. You can use your income from the bond to pay your expenses, or you can reinvest into other bonds, as you like. If you’d prefer not to buy individual bonds, you can purchase a bond fund and enjoy the reduced risk due to diversification.

Bonds or bond ETFs may be a better fit for tax-advantaged accounts, given that interest is the key part of their total return.

Dividend stocks

Dividend stocks may offer a bit of both worlds, some income today and the potential for capital gains and a higher dividend later. The trade-off is that income received from the dividend stock today is likely to be lower than what you could receive from an income-only investment such as a bond. But if you’re able to be patient, you’re likely to have a more powerful income stream, since the best dividend stocks can grow their payouts for decades, boosting your income later.

If you’d prefer to not pick individual stocks, it’s easy to purchase a top dividend-paying fund. You can enjoy a yield that’s likely to grow while having increased safety due to diversification. Dividend stocks may be a better fit for tax-advantaged accounts, given the payout.

Preferred stocks


Despite the name, preferred stock acts more like a bond than stock. Preferred stock pays income at a specified rate and may have a maturity like a bond, so it functions more like an “income now” strategy. The payouts on preferred stock may be higher than typical bond yields, and they may also be eligible for lower tax rates, depending on the exact security.

For a lower-risk way to invest in preferred stocks, search for the best preferred stock funds. Because of their high income, preferred stocks may be better in tax-advantaged accounts.

Real estate investment trusts (REITs)

REITs are popular with investors looking for income today and some growth later. REITs own real estate inside a tax-advantaged structure, so as long as the company pays out most of its cash flow to shareholders, it pays no corporate tax. REITs have a strong, long-term track record, and they’re popular with many older investors due to their larger payouts.

Investors here may want to turn to a top diversified REIT fund rather than analyze and invest in individual names. Because of their payouts, REITs may work better in tax-advantaged accounts.

S&P 500 index funds

An index fund based on the Standard & Poor’s 500 index contains hundreds of America’s top companies and is focused more on growth than paying dividends today. It can be a great vehicle for those looking to build wealth and while its dividend is small today, it can grow massively with enough time. So an S&P 500 fund is a great strategy for those looking to build income later.

The best S&P 500 funds are a good fit for taxable and tax-advantaged accounts. Because the dividend is a relatively small part of the total return, investors won’t be sacrificing too much return in a taxable account, and they won’t be hit with capital gains taxes until they sell anyway. Of course, inside a tax-advantaged account, you can avoid the drag from taxes.

Bottom line

Retirement savers need to establish alternative income streams for themselves, because they can’t rely on Social Security to maintain their standard of living. Those who start early — ideally as soon as they begin their working years — will have the chance to build a powerful income stream that can propel them through their golden years.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

©2024 Distributed by Tribune Content Agency, LLC.


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