Recs

6

Income for the Rest of Your Life

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

As you near or enter your golden years, a reliable, sufficient, income stream to live on becomes ever more valuable. Alas, with pensions disappearing, this goal is harder to achieve than it used to be. You'll need to weigh the pros and cons of a variety of options.

Guaranteed income
The most reliable incomes are guaranteed -- and that's what you get in immediate annuities from insurance companies. You fork over a big wad of money, and they promise to pay you a certain sum each month. For example, a 65-year-old man with $200,000 can buy an annual income of around $15,000 for life. 

The upside is obvious -- peace of mind -- but consider the downsides before signing up. For one thing, you'll likely spend a big chunk of our nest egg, only to receive less than you'd like. That $15,000 per year isn't a lot of money, unless you also have Social Security payments and additional savings or income.

Right now, bad timing has further tarnished these annuities. Current interest rates remain extremely low, meaning that policies will offer you less than they would in higher-rate environments. A recent Wall Street Journal article noted that while a 65-year-old woman can draw about $7,000 annually via a $100,000 policy, she would have netted close to $9,000 a decade ago, and $11,000 a generation ago.

Finally, there's inflation. Even if you're satisfied with what you'll reap from your annuity, the buying power of the payouts will shrink over time. If inflation sticks to its historic average of about 3% annually, the purchasing power of a $10,000 annual payout today will be cut almost in half in 20 years! If inflation is higher than average, the result could be much worse.

The dividend alternative
Due to all these concerns about annuities, it makes sense to look at strong dividend payers as alternatives. The WSJ article notes that investment returns for average retirees buying annuities amount to just 1% to 3% per year. It's certainly easy to beat that with dividends.

The following big names not only offer dividend yields topping 3%, but are also apt to increase those payouts over time, very likely staying ahead of inflation:

Company

Recent yield

Five-year avg. annual dividend growth rate

Banco Santander (NYSE: STD  ) 5.2% 7.6%
Sysco (NYSE: SYY  ) 3.6% 10.3%
Intel (Nasdaq: INTC  ) 3.1% 6.8%
Nucor 3.1% 27.2%
Waste Management (NYSE: WM  ) 3.5% 9.4%

Data: Motley Fool CAPS.

Still, dividend payments are just not as reliable as annuity payments. Sometimes big companies we can't imagine going out of business do go out of business -- think of Enron or Lehman Brothers. Even companies that remain steadily in business can disappoint us. General Electric (NYSE: GE  ) slashed its dividend by two-thirds in 2009, delivering a big blow to those counting on that income for retirement. GE has since been raising that payout significantly, but it remains less than half of what it once was. Between 2007 and 2009, Citigroup's (NYSE: C  ) quarterly dividend went from $0.54 to $0.32 to $0.16 to $0.01 to… zero.

Today, a company such as Annaly Capital (NYSE: NLY  ) has many investors licking their chops at its roughly 14% yield -- but with its payout exceeding its income lately, some worry that its dividend might get chopped.

Mitigate those risks
Clearly, whether you go with annuities or dividends (or other investments), there are risks and trade-offs -- all of which can be mitigated.

Spend all your annuity money now, and you risk interest rates going up, leaving you kicking yourself. Instead, consider laddering your purchases, perhaps spending a third of your annuity wad now, a third in three years, and the final third three years later. If you're willing to accept a lower initial payout, you can also buy an annuity with an inflation-adjustment feature.

With dividend-paying stocks, you can reduce your risk by not overexposing yourself to any one sector, and by looking for the healthiest companies you can find.

Finally, consider simply saving more aggressively and accumulating a bigger nest egg. It will buy you bigger annuity payouts and/or more dividend-paying stocks and will serve you better in retirement.

One way or another, you can build your own pension.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Intel, Sysco, and Waste Management are Motley Fool Inside Value and Motley Fool Income Investor recommendations, while Nucor is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Intel. The Fool has bought calls on Intel and  owns shares of Intel, Annaly, Nucor, and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1488499, ~/Articles/ArticleHandler.aspx, 12/19/2014 11:47:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated Moments ago Sponsored by:
DOW 17,793.17 15.02 0.08%
S&P 500 2,067.00 5.77 0.28%
NASD 4,762.62 14.22 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/19/2014 11:31 AM
C $53.97 Down -0.13 -0.24%
Citigroup Inc CAPS Rating: ***
GE $25.19 Up +0.05 +0.20%
General Electric C… CAPS Rating: ****
INTC $36.45 Down -0.57 -1.54%
Intel CAPS Rating: ****
NLY $11.24 Up +0.01 +0.09%
Annaly Capital Man… CAPS Rating: ****
SAN $8.60 Down -0.08 -0.92%
Banco Santander Ce… CAPS Rating: ****
SYY $40.98 Up +0.24 +0.59%
Sysco CAPS Rating: *****
WM $50.73 Down -0.13 -0.26%
Waste Management CAPS Rating: *****

Advertisement