What’s the best way to generate retirement income streams within your IRA? Not surprisingly, “best” is a relative term, and as is the case in lots of other contexts, whether something is the “best” or not depends on what your needs are. Here are some tips for choosing the most appropriate retirement income streams for your particular situation.
Retirement Income Streams tip #1: Balance Income Against Risk. There’s a reason that the safest income investments such as bank certificates of deposit generally pay among the lowest interest rates. By the same token, investments that pay a significantly higher than average interest rate generally come with significant risks of default.
That’s important to remember throughout all of your investment making decisions; virtually every investment comes with some risk of default. Don’t ever assume that your investment principal is 100% safe (although it’s probably still reasonable to make that assumption when it comes to U.S. Treasury investments).
Of course, this income/risk comparison isn’t a perfectly linear or predictable one, and reasonable investors may disagree on just how much risk is associated with a particular investment, and what level of risk is appropriate.
Retirement Income Streams tip #2: What Are You Using That Income For? One way to determine the best retirement income streams for your IRA is to focus on what you’re going to use that income for. For example, if you’re looking to build up assets that you’ll use to cover your living expenses, then you’re likely to seek out investments that are going to present the most dependable income streams, and for which your risk of capital loss is lowest. Blue chip stocks that have raised their dividend payouts every year for the past few decades, and real estate with a history of reliable tenants, should be near the top of your list of options to consider.
On the other hand, if you’re merely looking for retirement income streams to provide you with a measure of diversification within your portfolio, then investments that provide a more erratic or less reliable source of income may be more appropriate if they provide you with a greater level of overall return.
Retirement Income Streams tip #3: Be Careful of UBTI. UBTI is an unwieldy acronym that stands for “unrelated business taxable income.” In the context of self-directed IRAs, UBTI generally includes income that’s generated by a trade or business, or some other trade or business activity that’s not substantially related to the tax exempt status of the IRA. Fortunately, the UBTI rules exclude most income that comes from passive investments, such as stock dividends, annuity income, interest payments, royalty payments, and most types of real estate rental income.
The upshot is that some types of investment income will be a better fit for your needs than other options. By understanding exactly what the needs of your portfolio are, you’ll increase the likelihood that you’ll make the best long term decisions for your retirement.
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