Though it looks like the market is beginning to turn around somewhat, we’re still living in an incredibly low-yield environment. When you’re buying your first home, this is great. When you’re trying to make your retirement savings last, it’s challenging.
Many of today’s retirees are having trouble maintaining their savings in this low-yield environment. Times like these call for creativity and extra planning, as traditional retirement investments simply aren’t cutting it. If you need to increase your yield to further stretch your retirement funds, here are six options for doing it:
1. Online banks and credit unions. While you’re not going to make a lot of money on any savings account these days, increasing your savings yield by moving your liquid savings can be helpful. Credit unions and online banks both tend to offer better savings and checking account yields than traditional larger banks. Taking advantage of special savings and checking account offers can really increase your liquid savings yield. Watch for offers from credit unions and high-yield, low-fee online savings accounts.
2. I bonds. I bonds can be an excellent low-risk investment that protects your money from inflation. They earn interest based on a fixed rate combined with a variable rate indexed for inflation.
Even though I bonds get very little by way of interest – 1.18 percent between May and October, 2013 – the fact that they’re indexed for inflation keeps you from losing money every year. Sure, other investments may earn more like 2 or 3 percent, but without that extra inflation rate, you’ll actually lose money over time. There are some restrictions in terms of getting access to your money in the first year, and you’ll pay a small penalty if you withdraw your money in the first five years, so be sure you understand how I bonds work before making the investment.
3. Dividend-paying stocks. While even the best dividend-paying stocks don’t pay out as much as they did 50 years ago, they can still be a good option for increasing your yield. As with all other stocks, it’s important to do your research here. It’s also smart to avoid too-good-to-be-true dividend-paying stocks. Some companies set their dividends too high, leading them to financial ruin in the future. But financially sound, high growth companies offering dividend-paying stocks can be a great investment.
4. Short-term bond funds. Long-term bond funds are susceptible to what is called interest rate risk. As interest rates rise, the value of long-term bond funds fall. While that may seem odd, the reason is simple. Long-term bonds lock in the interest rate for as many as 30 years or more. If the rate is low, and then interest rates begin to rise, these long-term bonds lose their appeal as investors prefer current offerings with high rates.
Short-term bond funds, however, don’t have the same risk. Because these bonds mature in a relatively short time period, a rise in interest rates does not affect the value of short-term bonds in the same way. While rates are typically lower on bonds with shorter durations, they can be ideal for income investors.
5. Junk bonds. While you certainly don’t want to invest a large part of your portfolio in high-risk securities like junk bonds, allocating a small portion can increase your yields. Junk bonds typically have a rating of BB or lower by Standard and Poor’s, making them riskier investments. However, these bonds could have a place in even a conservative investor’s retirement portfolio. Personally, I invest a small percentage of my portfolio in junk bonds and other high-yield, higher-risk bonds.
6. REITs. Real estate investment trusts offer an excellent way to increase income. A REIT trades like a stock and invests directly in real estate. REITs typically invest in properties and collect rents (called an equity REIT) or invest in mortgages (called a mortgage REIT). Because of special tax considerations, REITs pay dividends of at least 90 percent of their taxable income, which can make them ideal for retirees. Of course, REITs also expose investors to the ups and downs of the real estate market, which should be considered before making an investment.
The above options show that to get a higher yield, investors must take on more risk. However, a combination of the above options in conjunction with a well-diversified portfolio may be able to help you boost your yield without taking on an unacceptable level of volatility.
Rob Berger is an attorney and the founder of the popular personal finance blog, the Dough Roller.