Investment Types for Retirees

Remember when you used to get a paycheck every Friday or on the 15th and 30th of each month? That was income you could count on. That was security. Well, the days of a steady paycheck are largely behind you. Now that you’re retired, you have to arrange your own income. It may come from more than one source. It may be paid at irregular intervals. It may be larger some months than others. But if you set things up correctly, you’ll have a stream of income you can count on to pay your bills and meet your needs.

Now that you’ve retired, your income may come in several different forms. You may get returns on your personal savings. You may receive a pension or be able to take withdrawals from retirement accounts. You may be receiving (or entitled to receive) Social Security benefits. Each source, standing alone, may not seem like a whole lot of income. But put them together, and you may be surprised at how large your monthly income really is.

All those years you saved and saved, and for what? A rainy day. Well, here’s that rainy day. Now you can begin to use your savings to give you retirement income. Instead of putting money into these investments, you can begin to take money out of these investments.

• Bond mutual funds – Interest
• Certificates of deposit (CDs) – Interest
• Commercial annuities – Income
• Common stock – Dividends
• Corporate bonds – Interest
• EE bonds – Interest (free from state tax)
• 401(k) plans – Income
• Money market funds – Dividends
• Municipal bonds – Interest (tax free)
• Pensions – Income
• Preferred stock – Dividends
• Real estate investment trusts (REITs) – Dividends and/or capital gains
• Regular IRAs – Income
• Roth IRAs – Tax free if withdrawals taken 5 years

1. After initial contribution and on
2. Account of being 59½ or meeting
3. Other conditions

• Savings accountsInterest
• Stock mutual fundsDividends and/or capital gains

You don’t get any income (or capital gains) when you’re only getting back what you put in (called your basis or investment). So, for example, when you buy a commercial annuity, the only part that’s income is over and above what you put in. Each annuity payment, then, represents a return of your own investment and income earned on the investment; you’re taxed only on the income, not on your own investment.

In terms of what you have to spend, it doesn’t really matter whether the income is labeled interest, dividends, or something else. However, it’s important to know the label because this affects the tax treatment of the income. In the end, it’s after-tax income (what you have left to spend after you’ve paid your taxes on the income) that matters.

For example, you live in New York and receive $1,000 interest from a GM bond and $1,000 interest from a NYS Triboro Bridge and Tunnel Authority. Are both payments equal? The answer is probably no. Let’s say you’re in the 28% federal income tax bracket. After paying tax on the GM bond, you’ll have $720; however, there’s no federal income tax on the NYS bond, so you’ll have the entire $1,000 to keep. But don’t also forget the impact of state taxes. States with an income tax typically levy it on out-of-state bonds but not on in-state bonds (in the preceding example, the NYS Triboro Bridge and Tunnel Authority bond was an in-state bond for a person living in New York). But state income tax applies to both in-state and out-of-state bonds in Colorado, Illinois, Iowa, Kansas, Oklahoma, and Wisconsin. No state income tax applies to in-state and out-of-state bonds in Indiana, North Dakota (if the state’s short form is used), and Utah.

In addition to income on your savings, you can generate payments by using up your capital. For example, suppose that you’ve saved $50,000 that you’ve invested in CDs. As they become due, you can use some of the cash rather than buy new CDs (you can always tap into your CD before it matures, but you’ll pay a bank penalty). You can spend this cash as retirement income.