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Category: Bonds

Creating Income Streams for your retirement

Once people get near retirement, they start thinking about income streams besides Social Security and pensions. There are several different methods to do this. Today, I’ll cover one of them. I’ll go over other ways to create income in retirement in other blog posts.

The first way to create income is by choosing investments that pay a dividend or interest and living off of the interest income.

Equities – Many equities pay a dividend. Usually this is paid out quarterly to the shareholder. Some pay out monthly, some pay out yearly, but quarterly is the most common. The dividend is a certain amount of money per a share owned. Most often, this is expressed as the” Dividend Yield”. For example, you see a stock that pays a dividend of 3.25%. What this means is that the dividend that is paid out is currently 3.25% of the stock price. So if the stock is $100.00 a share, the payout will be $3.25 over the course of a year for each share owned. Many investors hold dividend paying stocks, reinvest the dividends to buy more shares of stock. Once they retire, they “flip the switch” and start taking the dividend income from the equities.

Companies can change their dividend. If company performance is good, they may increase the dividend. This is usually an indicator of a healthy bottom line. Purchasing stocks in companies that have a history or rising dividends may be a good strategy for some investors. Over time, if the dividend keeps rising, you will give yourself a raise. That can be fruitful with rising inflation.

Bonds – When you purchase a bond, you are basically loaning money to a company or government entity. Over the duration of the term of the bond, the company agrees to pay the bond holder a certain percent return. For example, let’s say you purchase $10,000 of a bond that is paying 6% interest. Each year, the company will pay you a fixed amount of $600. When the bond comes to its due date, the company repays you your original investment amount. Bonds have different maturity lengths. Shorter maturity lengths (3-5 years) usually have lower interest rates, and longer bond maturities (20-30 years) usually pay more interest. You can liquidate a bond before the maturity date, but you the face value of the bond may be more, less or the same as what you purchased it for.

Fixed Annuities – Fixed annuities are products that are purchased from insurance companies. They are quite similar to CD’s (Certificates of Deposit). The two differences are that CD’s are FDIC insured. Fixed annuities are backed by the insurance company. The other difference is that fixed annuities grow tax deferred, where CD interest is taxable each year. As implied, fixed annuities pay a fixed interest rate for a certain term of time. This interest can be compounded until the annuity reaches maturity. The other option is that the interest can be taken as it is paid out. If an investor takes the interest as it’s paid out, then the interest will be taxable at that time. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges may apply.

Alternative Investments – The last asset class is alternative investments. These are investments outside of stocks, bonds and fixed annuities. Some examples are privately traded REIT’s (real estate investment trusts) and BDC’s (Business Development Corporations). They frequently are for investors with a net worth of $250,000 or more. They aren’t as liquid as a stock or a bond. However, many pay a handsome dividend rate. They also don’t correlate to the performance of the stock and bond markets, so they have the potential to give investors a good income stream while not seeing the same performance volatility as a stock or a bond. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

There is no guarantee that the Business Development Company (BDC) will achieve its investment objectives. Investing in private equity and private debt is subject to significant risks and may not be suitable for all investors. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity and liquidation at more or less than the original amount invested.

No investment strategy assures a profit or protects against a loss.

These are few ideas to get you going on income streams. Look for future blog posts for other ideas.

Always talk to a seasoned financial advisor for advice for your particular situation.

I’m available to chat with if you have specific questions about your situation.

photo credit:ComputerHotline

Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial. www.silverkeywealth.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Silver Key Wealth Management, a registered investment advisor and separate entity from LPL financial.
Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, VA, NJ, TX. www.finra.org. www.sipc.org

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Bonds, Corporate Bonds

Many folks out there think of stocks when they think of investing. Well, my wise LGBT friends, that is only one piece of the puzzle. One of the most overlooked investments is the individual corporate bond.

Drops
Photo credit: 55laney69

When a business wants to raise a large amount of money, they issue bonds. You purchase the bond and the company pays you a predetermined amount of interest (usually monthly, quarterly or yearly) for a set amount of time. At the maturity date of the bond, you get the principal back. So basically, you are acting as the bank and making a loan to a company.

Why own them?
Good question! Here’s the answer: They may help add stability to your portfolio. It’s nice to know how much interest you will receive and when you will get it. Plus when the stock market is volatile, you know you have a holding in your portfolio that is giving you a consistent return.

Here is an example:
A bond may pay 6% interest and has a 20 year term to maturity. That means that on a $10,000 investment you will receive $600/year x 20 years = $12,000 interest over the life of the bond, plus you get back the initial $10,000 that you invested. That’s a 120% return on your initial investment plus your principal back! (This is a hypothetical example for illustrative purposes only and is not representative of any specific investment. Your results may vary).

Other stuff you should know:
Sometimes companies have severe financial hardships or go bankrupt. If they do, they can default on their bonds, which means that you can lose your future interest payments and/or the principal that you put into your bond investment. So if you are looking at purchasing bonds, look at their credit rating. AAA is the best rating , anything that is BB+ or below is considered to be a “junk” bond and is very speculative.

Redemption:
Can you sell bonds early? Yep, you can. The value of the bond can fluctuate, though. It may be worth more, the same or less than when you purchased it. So if you do sell it before the maturity date, you may lose money or make money. Many factors can affect the price of a bond, including interest rate changes, credit quality of the company and what the stock (equity) market is doing.

It is best to speak to a financial professional before you venture into the world of bonds! See if they are right for you and your current financial situation.

 


 

Sharon_Herman_HeadshotSharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial, the largest independent broker/dealer* in the United States. www.silverkeywealth.com

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor and separate entity from LPL financial.

Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, VA, NJ, TX. www.finra.org. www.sipc.org

*Financial Planning Magazine (June 1996-2013 based on total revenue)

 

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