Retirement can turn the search for investment income into a delicate balancing act. A portfolio needs to generate enough cash to support withdrawals, but reaching too aggressively for yield can expose retirees to credit risk, price swings, dividend cuts or investments that fail to keep pace with inflation.
“It’s essentially a trade-off between the income versus risk,” says Roland Chow, financial planner and portfolio manager at Optura Advisors in Burlingame, California. A 10% distribution may look attractive on paper, but income is only useful if it’s sustainable, tax-efficient and paired with a level of risk you can live with.
“The key is not to treat yield as the only objective,” says Jason Bloom, head of fixed income ETF strategy for Invesco. “Higher income often comes with higher credit risk, greater price volatility, or both, so retirees should focus on the durability of income and cash-flow planning rather than simply reaching for the highest yield available.”
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For retirees looking to increase portfolio income, the goal is to build a mix of investments that can support spending needs without taking unnecessary risks. Here are five ways to increase your income in retirement without throwing caution to the wind.
1. Dividend stocks
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“Retirees evaluating dividend growth stocks should look to companies with moderate but consistently growing dividends,” says Jason Fannon, a certified financial planner and senior partner of Cornerstone Financial Services in Southfield, Michigan. This can “signal financial health and a commitment to returning capital to shareholders.”
He says to look for a dividend payout ratio below 60%, which suggests the dividend has room to grow.
Investors should also look beyond earnings. Free cash flow is a better metric to use because net income can be affected by non-cash accounting, according to Chow. As a rule of thumb, he says “a stable or increasing free cash flow trend even while dividends are being raised is an excellent sign.”
2. Real estate investment trusts (REITs)
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Since REITs are required to distribute at least 90% of taxable income to shareholders, they generally provide higher yields than other stocks.
The trade-off is that REIT income is not risk-free. Fannon cautions that REITs can be cyclical and closely tied to broader real estate conditions. Interest rates can also impact returns: “rising rates can increase borrowing costs and make them less attractive compared with other fixed-income securities.”
REITs can also use leverage, which may amplify returns but also exacerbate losses, Chow adds. And REIT income is typically taxed as ordinary income, so it does not receive the more favorable qualified dividends tax rate.
3. Municipal bonds
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This tax treatment can make munis more valuable for retirees in higher tax brackets, but they’re not automatically the best income choice. The trick is to compare a muni’s tax-free yield with the after-tax yield available from taxable alternatives such as certificates of deposit (CDs), Treasuries or money market funds.
To do this, take the municipal bond’s yield and divide it by one minus your marginal federal tax rate. For example, if the muni yields 3.5% and you’re in the 32% federal tax bracket, your taxable-equivalent yield is 5.15%, or 0.035/(1-0.32). If this is higher than the yields offered elsewhere, the municipal bond could be a tax-savvy choice.
4. Bond ladders and target maturity ETFs
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Retirees need income they can rely on, which can be hard to build with equity-linked investments that can be vulnerable to drawdowns. That’s where fixed-income strategies such as bond ladders and target maturity ETFs can help.
With a bond ladder, you spread money across bonds or bond funds that mature in different years. As each rung of the ladder matures, you can spend the proceeds or roll it into a new rung to create a steady stream of portfolio cash flow.
Defined maturity ETFs offer one way to build that type of structure without buying individual bonds. “They combine income potential with a known maturity year, which can help investors align fixed income exposure with future spending needs,” Bloom says.
For example, the Invesco BulletShares 2030 Corporate Bond ETF (BSCU) will terminate and distribute cash to shareholders around December 15, 2030.
“Instead of holding a perpetual bond fund with no stated end date, investors can build a ladder across maturity years and decide when and how to redeploy proceeds as each rung matures,” Bloom says.
That structure can be especially useful when cash yields are at risk of falling. Bloom notes that cash and money market funds can cover near-term spending needs, but their yields reset quickly when short-term rates decline. Target maturity bond ETFs, by contrast, may allow retirees to lock in yields for specific future years. Just be sure to weigh credit risk carefully, especially if you use high-yield funds.
5. Covered-call ETFs
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That extra cash flow may be useful, but it comes with trade-offs. “Covered-call ETFs can provide higher monthly income and smoother returns in sideways markets, however they have capped upsides during a strong bull market,” Fannon says. If the market price of that security rises above the option’s strike price, the option holder will likely exercise the right to buy the shares at the lower strike price.
This makes it important to consider if the higher monthly income is worth giving up some long-term growth potential for future spending, Fannon says. In either case, covered-call ETFs “are typically better suited as a supplement, rather than a core holding,” he says.
