This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Investing For Income As Retirement Approaches

By John Spence


Generating sufficient income is one of the biggest challenges for investors nearing or in retirement. Low interest rates and the fact that individuals are living longer make this goal even more important.

Although it's difficult to determine exactly how much investors will need during retirement, a rule of thumb is 80% of pre-retirement income. Of course, how early investors plan to retire and future inflation are among the wild cards when estimating income needs.

Annuities are one popular retirement option for income, but individuals looking for yield can also consider certain asset classes in their investment portfolios.

"Finding income near retirement is a problem," says Matthew Pierce, president and founder of Island Light Capital, a Massachusetts-based registered investment adviser. Island Light Capital manages several portfolios on Covestor, including the Income Portfolio.

With 10-year Treasury note yields still stuck below 3%, a traditional bond portfolio may not generate enough income for investors in retirement. What's more, low inflation and weak employment data suggest the Federal Reserve probably isn't in a hurry to scale back its bond purchases or raise interest rates.

"Rates in fixed-income markets are quite low, and it's a lot harder to generate a 5% income stream now than it was just 10 years ago when rates were much higher," Pierce said.

The catch is that older investors and those in retirement are naturally more risk-averse because they don't have as much time to recover from losses, relative to younger investors early in their careers. This means investors close to or in retirement need to be very careful about adding riskier asset classes such as dividend-paying stocks in search of yield. Other income-producing sectors such as Master Limited Partnerships (MLPs) and preferred shares can also be volatile in the short term.

One relatively conservative option for income is investment-grade international bonds that are paying higher yields than U.S. Treasuries. Vanguard Total International Bond ETF (BNDX) invests in this asset class but minimizes currency risks by hedging its exposure to foreign currencies.

Adding corporate bonds is another way to boost income. However, Pierce favors investment-grade corporate debt with shorter durations to limit risk.

"We're trying to avoid duration risk rather than credit risk. Longer maturities mean a bigger hit if interest rates rise," he said, adding that the risk of loss is greater than the opportunity of owning long-term bonds. Bond prices and yields move in opposite directions.

ETFs that invest in short-term corporate bonds include iShares 1-3 Year Credit Bond ETF (CSJ) and Vanguard Short-Term Corporate Bond ETF (VCSH).

These funds for investment-grade international bonds and short-term corporate debt aren't paying huge yields. But at least they can beef up the choices for low-risk investors approaching retirement who want some yield.

For those who are willing to take on a little more risk, mortgage-backed securities could be one fixed-income sector to consider. The iShares MBS ETF (MBB) tracks mortgage-backed bonds issued by Freddie Mac, Fannie Mae and Ginnie Mae.

"The credit risk is as good as the U.S. government," Pierce said. These agencies were bailed out during the financial crisis, so the bonds are backed by the government.

"Mortgage-backed bonds are a large portion of the U.S. bond market, so they have a place in fixed-income portfolios. They're not as volatile as many investors think they are," Pierce noted.

Other ETFs for the asset class include SPDR Barclays Capital Mortgage Backed Bond ETF (MBG) and Vanguard Mortgage-Backed Securities Index ETF (VMBS).

The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Matthew Pierce

Matthew Pierce

Island Light Capital Corporation is an investment advisory and consulting firm that specializes in the development of optimally diversified investment

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.02 0.00%
FB $104.07 0.00%
GOOG $683.57 0.00%
TSLA $162.60 0.00%
YHOO $27.97 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs