Some Features of Certificates of Deposit

Best Retirement Investments for a Steady Stream of Income

1) Immediate Annuities

Immediate annuities provide guaranteed income immediately (hence the name). They are a form of insurance rather than an investment (but still included here because they provide steady income). A ten-year term-certain annuity, for example, buys a stream of income for ten years. Because immediate annuities start paying out right away, they appeal to people already retired. They are not for everyone – they tie up assets, and you may “lose” money if you die before fully “cashing out.” Immediate annuities may be advantageous if you have trouble staying within your spending limits, cannot stick to an investment plan, or have no monthly sources of income besides Social Security.

2) Bonds

Bonds, individual or bundled in funds, are loans you give to governments, municipalities or corporations that then pay you regular interest. When the bond matures, its face value is returned to you. We often recommend clients purchase bonds in a bond ladder, which is a collection of bonds that have different maturity dates set to match their future cash flow needs. Bonds are a lower-risk option than other investments, which means lower returns (usually). Buy bonds not to grow money but for the regular interest income they produce, and for the guaranteed principal you will receive when they mature.

3) Retirement Income Funds

Retirement income funds are great for folks who aren’t interested in keeping regular tabs on their portfolio. They are a type of mutual fund; they automatically invest your money in a diversified portfolio of stocks and bonds. The fund’s goal is to produce monthly income. Most people have experience with mutual funds, so they feel comfortable with retirement income funds. And, like mutual funds, retirement income funds are set up so you can access your money at any time.

4) Rental Real Estate

Renting out property for income requires a hands-on approach, and in many cases, more work than you might have anticipated for your golden years. Research and forethought are key. Before you decide to become a landlord in retirement, consider the rental property expenses you may incur over the time-frame you plan to own the property, like maintenance, damage from negligent renters, natural disasters, etc. You also need to factor in vacancy rates—no property remains rented 100 percent of the time. For those with a real estate background, or if you want to put the time in, real estate can be a great source of regular income but go in with your eyes wide open.

5) Real Estate Investment Trusts (REITs)

A REIT (Real Estate Investment Trust) is a mutual fund that aggregates real estate holdings (apartment buildings, commercial structures, vacation properties, etc.). For a fee, professionals manage the properties, collect rent, and pay expenses, and you receive the remaining income. As part of a diversified portfolio, REITs can be a good retirement investment choice.

6) Variable Annuity With a Lifetime Income Rider

I devote twelve pages in my book Control Your Retirement Destiny to variable annuities. That’s because they’re complicated. In a variable annuity, your money goes into a portfolio of investments you choose. For a fee, you can add an optional benefit, called a rider. The rider insures the amount of future income you can withdraw from your portfolio. Variable annuities come in many flavors, and many people who offer them don’t truly understand them. Be cautious – sometimes I see variable annuities with total fees running about three to four percent (ouch!) a year. Your investments will have to earn back the fees and more for you to benefit.

7) Closed-End Funds

Not for newbie investors, closed-end funds encompass a wide range of investment approaches that may be unfamiliar to the layman (they overlay stocks and bonds with strategies like dividend captures and covered calls). Income comes from interest, dividends, premiums from selling options like covered calls, or return of principal. Some closed-end funds use leverage (they borrow against the portfolio) —an additional risk that is employed to buy more income-producing securities so the fund can pay an overall higher yield. Closed-end funds can be a great retirement investment option, as part of a mix, for savvy investors.

8) Dividend Income Funds

A dividend income fund, like other funds, is a collection of stocks overseen by a fund manager. The dividends you receive come from the dividends paid out by the underlying stocks in the fund. Dividends can rise one year and fall the next. Some publicly-traded companies generate qualified dividends, which are taxed at a lower rate than other income. As such, it may be most tax-efficient to hold qualified dividends within non-retirement accounts (meaning not inside of an IRA, Roth IRA, 401(k), etc.). I caution clients to be wary of funds that advertise high yields – yields that are higher than average typically come with additional risks.

9) Total Return Portfolio

When done right, a total return portfolio is one of the best retirement investments out there. It is not a stand-alone investment; it is a strategy that uses a balanced, diverse blend of stock and bond index funds that provide retirement income in the form of interest, dividends, and capital gains. The portfolio is designed to achieve a respectable long-term rate of return, and along the way, you follow a prescribed set of withdrawal rate rules that will typically allow you to take out 4-7 percent a year, and in some years, increase your withdrawal for inflation. What does “total return” mean? Well, unlike a Certificate of Deposit, that has a specific interest rate, with a total return portfolio you don’t know what the actual return will be each year. Some years your investments could be up 14%, and other years down -10%. But you know over a ten-year span of time that a specific mix of investments, such as 60% stock index funds and 40% bonds, has a high probability of earning a 6-7% average rate of return. So you are targeting that “total” average return, rather than knowing the exact outcome each year.

Parting Thoughts

This introduction to income-generating retirement investments is a lot to take in. If you want to learn more, on YouTube you can watch a recording of our Best Retirement Investment class, which we held online on Thursday, Aug. 9th, 2018.

Keep in mind many of the vehicles discussed above are investment products, not financial planning tools. Many financial advisors are salespeople who place too much emphasis on investment selection and investment products and too little on planning. Make sure you have a well-designed retirement income plan in place before you buy any financial product.

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Retirement Planning: How Much Will I Need?

Retirement Planning: How Much Will I Need?

There are several key tasks you need to complete before you can determine how large a nest egg you’ll need to fund your retirement. These include the following:

  1. Decide the age at which you want to retire.
  2. Decide the annual income you’ll need for your retirement years. It may be wise to estimate on the high end for this number. Generally speaking, it’s reasonable to assume you’ll need about 80% of your current annual salary in order to maintain your standard of living.
  3. Add the current market value of all your savings and investments.
  4. Determine a realistic annualized real rate of return (net of inflation) on your investments. Conservatively assume inflation will be 4% annually. A realistic rate of return would be 6% to 10%. Again, estimate on the low end to be on the safe side.
  5. If you have a company pension plan, obtain an estimate of its value from your plan provider.
  6. Estimate the value of your Social Security benefits.

A Sample Calculation

Before we begin with our sample calculation, a word about inflation. When drawing up your retirement plan, it’s simplest to express all your numbers in today’s dollars. Then, after you’ve determined your retirement needs (in today’s dollars), you can worry about converting the numbers into “tomorrow’s dollars,” i.e. factoring in inflation.

Just remember not to mix the two. If you do, your numbers won’t make any sense! After all, how do you contribute $300 in 2025 dollars each month to your retirement plan?

Compute all of your numbers in today’s dollars. When you are finished, you can apply an inflation assumption to get a realistic estimate of the dollar amounts you will be dealing with as you make your contributions over the decades.

Now on to the sample calculation. Consider the hypothetical case of John, a 40-year-old man currently earning $45,000 after taxes. Let’s go through the key factors for John:

  1. John wants to retire at age 65.
  2. John will need $40,000 of annual retirement income – in today’s dollars (i.e., not adjusted for inflation).
  3. John currently has $100,000 in savings and investments.
  4. Over 25 years of investment (age 40 to 65), John should realistically earn a 6% annualized real rate of return on his investments, net of inflation.
  5. John does not have a company pension plan.
  6. Visiting the SSA website, we can quickly calculate John’s estimated Social Security benefits in today’s dollars. Assuming John is born on today’s date 40 years ago and will retire 25 years from now, we can retrieve his estimated Social Security benefits in today’s dollars. The SSA website gives us a value of around $1,300 per month.

Now, John determined he would need $40,000 (in today’s dollars) annually to live during his retirement years. To the nearest $100, this works out to about $3,300 per month. Assuming John’s Social Security funds come through as estimated, we can subtract his estimated monthly benefits from his required monthly income amount.

This leaves him with $2,000 per month that he must fund on his own ($3,300 – $1,300 = $2,000), or $24,000 per year.

John is in good health and has a family history of longevity. He also wants to make sure he can pass along a sizable portion of wealth to his children. As a result, John wants to establish a nest egg large enough to enable him to live off of its investment returns – and not eat into his principal  – during his retirement years.

Because John should be able to earn 6% annualized returns (net of inflation), he will need a nest egg of at least $400,000 ($24,000 / 0.06).

Of course, we haven’t accounted for the taxes John will pay on his investment income. If his capital gains and investment income is assumed to be taxed at 20%, he will need a nest egg of at least $500,000 to fund his retirement income, since a $500,000 retirement fund earning 6% real returns would produce income of $24,000 after 20% taxes. Consider, too, that any tax-deferred retirement assets will be taxed at his ordinary income tax rate, leaving him with even less disposable income.

Keep Inflation in Check

Now, keep in mind all these numbers are expressed in today’s dollars. Since we’re talking about a time period spanning several decades, we’ll need to consider the effects of inflation. In the United States, the federal government has kept inflation within a range of 2% to 4% for many years, and analysts project that it will remain within that range for a while. Therefore, assuming 4% annual inflation should keep your projections from falling short of your actual financial needs.

In John’s case, he needed a $500,000 (in today’s dollars) nest egg 25 years from now. To express this in the dollars of 25 years from now, we simply multiply $500,000 by 1.04, 25 times.

This is equal to 1.04 to the twenty-fifth power, multiplied by $500,000. So, we have:

  • Nest Egg = $500,000 x 1.0425
  • Nest Egg = $500,000 x 2.67
  • Nest Egg = $1,332,900

As you can see, the $1.3 million dollar nest egg is a much larger number than the $500,000. This is because inflation causes purchasing power to erode over time and wage rates to increase each year. Twenty-five years from now, John won’t be spending $40,000 per year – he’ll be spending $106,600 ($40,000 x 2.67).

Either way, for the purposes of our retirement calculation, the inflation assumption doesn’t really matter. A $500,000 nest egg and a $40,000 budget expressed in today’s dollars is the same thing as a $1.3 million nest egg and a $106,600 budget 25 years from now, assuming inflation has run its course at 4% per year.

The key is that we assume that savings will grow at a real rate of return of 6% annually. The numbers would actually be growing at 10% annually, but inflation would be running at 4%, so the growth in purchasing power would actually be 6% per year.

You don’t need to worry about this too much for your retirement plan, but just keep inflation in mind when you determine how much you want to save for your nest egg every month. A $200 monthly contribution is nothing to sneeze at right now, but after 20 or 30 years, $200 won’t buy you very much. As you continue with your retirement plan year after year, simply check the inflation number each year and revise your contributions accordingly. Provided you do this, you should be able to grow your capital at your estimated real rate of return and reach your target nest egg.

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4 Best Child Investment Plans

Many parents these days look at the Unit Linked Insurance Plans and children saving plans that insurance companies and fund houses tend to provide. They do provide insurance and some sort of safety comfort for your child’s education, but, the returns are poor. In fact, if you deduct the expense associated with these child’s plans your returns are reduced.

PPF

This is the best scheme to invest for a number of reasons. It is a 15-year scheme where you can build a corpus for your child’s education. The current interest rate of 8 per cent by far beats interest rates of banks, which are at 7.5 per cent. With the RBI hiking interest rates and bond yield rising, it is hoped that the government would revise the interest rates from the coming quarters. The interest earned is tax free in the hands of investors. Apart from this you get a tax rebate of upto Rs 1.5 lakhs under Sec 80C of the Income Tax Act. All in all this makes it a very attractive scheme to invest. This is probably one of the best ways to build a child plan corpus. Only the larger lock-in period is the only worry, but, that in turn helps you to build a corpus. Go for this as they are more tax efficient as well. Safety is a big assurance as far as the PPF is concerned.

Gold Saving

You can invest in gold for a child of yours. But, do not do it through physical gold. The best option would be the gold ETFs, because there is no locker and other storage charges. Also, you can invest in the electronic form and there is no worry of theft. You can invest small amounts each month and thus build a sizeable one by buying small amounts. Gold has generated much better returns than most asset classes in the more longer term. So, typically a holding period of say 10-15 years could result in decent gains. The disadvantage of course is that you have to pay capital gains tax when you sell. However, you can also go for jeweller schemes, which would be helpful if you have a girl child and have some jewellery for her. Risk of fall in gold prices remains a worry, though over a period of time, gold has always outperformed.  At the moment 22 karats gold in Mumbai is trading at Rs 31,000. Because of hardening of interest rates, gold prices have fallen a bit. They can be a good bet at the current prices for long term.

Equity mutual funds

Everybody often goes gung-ho with equity mutual funds to generate wealth for children. However, this has some risks. The problem is one is not sure at the time of redemption or if your child needs the money, how the markets would be. For example, if you want to redeem all your units in 2030 to meet a child need you are not sure if the markets would be buoyant at that time. However, many equity mutual funds have beaten returns from even bank deposits and have given sizeable returns. So, if you are a long term investor, these tend to give you returns like no other. If you are planning to save money for your children’s education or other such plans, look no further then equity mutual funds. The income distributed by equity mutual funds would now be subject to tax, so your overall returns could reduce.  So, one as to be really careful before choosing equity mutual funds.  Be warned that these are risky and there is no certainty that at the time you want to redeem the markets would be high. A slightly more risky child investment plan to consider.

Debt mutual funds

Some debt mutual funds offer better returns than bank deposits. They are also more tax efficient than bank deposits, which makes them a better choice. However, you need to opt for the safe child plans more than anything else. Go for them if you are planning a very long term investment, given the fact that they give better returns in the more long term. Again, you may need some professional advise here, given the fact that some of these schemes could be a little risky. Go for debt mutual funds that are heavily tilted towards AAA securities. This would provide you some respite in case markets fall. Gilt edged funds, which invest most of the money in government security may also be good a bet.  Returns from debt mutual funds would largely be in line with interest rates in the economy, which are now offering between 7.5 to 8 per cent.

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Read more at: https://www.goodreturns.in/personal-finance/planning/2017/01/7-best-child-investment-plans-india/articlecontent-pf6758-535588.html

Read more at: https://www.goodreturns.in/personal-finance/planning/2017/01/7-best-child-investment-plans-india/articlecontent-pf6758-535588.html

Read more at: https://www.goodreturns.in/personal-finance/planning/2017/01/7-best-child-investment-plans-india/articlecontent-pf6757-535588.html