With the challenges that come with the stock market—volatility, the possibility of inflation, taxes—retirees looking for income should consider investment opportunities besides the traditional mutual funds, stocks, bonds, variable annuities and cash.
For the most part, retirees are looking for income from their investments. They also want a measure of safety and stability since they're no longer working. Traditional asset classes that are considered conservative and produce income, such as certificates of deposit, fixed annuities and government securities, are certainly less risky than traditional investments, but they also pay very little, usually 2% or less.
These low yields are leading some retirees to look at other options, including the stock market and corporate bonds. The catch is the stock market continues to be volatile and even some of the highest-yielding bonds pay just 4% or less.
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Instead, consider alternative asset classes, an especially good possibility for retirees who have the necessary liquid net worth. These types of investments include real estate, private debt, private equity, hedge funds, natural resources and managed futures. There are always risks, of course, but diversifying with non-traded alternative investments can lead to lower volatility, less correlation and an increased cash flow, sometimes as steady as 5% to 8%, which is often paid out on a monthly basis.
Within each category, you can choose from a wide array of potential investments. Commercial real estate, including real estate investment trusts, can prove to be a solid investment, especially as investors can choose which sector to put their money in. Multifamily housing and apartment complexes can also be excellent investments as demand continues to increase.
Given current demographic trends, this sector continues to grow. Millennials, currently a very nomadic generation, want apartments since they continue to change jobs and put off getting married and having children. They're even willing to pay more rent so they can live downtown instead of in the suburbs. Baby boomers are also increasingly choosing to live in apartments as they downsize and head to warmer climates in the winter and cooler ones for the summer. Plus, the demand for apartments will only grow as interest rates go up and people shy away from taking on mortgages. Many retirees are investing in multifamily real estate and generating as much as 5% to 6% in income from this asset class.
Retirees looking for a good investment that can generate stable income, as well as potentially strong returns, should also look at other sectors of real estate. As more Americans opt for apartments instead of homes, they rely more on storage facilities, which can provide great investment opportunities. Finally, health care facilities can be a fairly safe bet, especially those that work with seniors, given the changes in demographics as Americans continue to live longer. This sector offers a great and defensive investment opportunity that can also generate non-correlated income.
Of course, for retirees looking to avoid the market, there are plenty of alternative investment opportunities outside of real estate. Some investors can even look to leading universities for a good example of investing. One of the largest allocations to many large endowments is private equity. Income-producing private equity is an attractive asset class, especially when following the endowment model used by schools across the country. Usually open to only accredited investors, private equity has almost always outpaced stocks and other investments.
Now open to more investors than ever before, private equity can often lead to high current cash flows, as well as holding potential for long-term growth. Private-equity firms are increasingly investing in defensive industries such as health sciences, IT infrastructure and even car dealerships. There are plenty of reasons big names including Michael Jordan and Warren Buffet invest in car dealerships. They have ample cash flow, a high barrier to entry and are often a recession-resilient industry. These factors make them attractive investments for private-equity firms.
Retirees should look outside stocks and bonds to include defensive, income-producing alternative investments in their portfolios. Alternative investments can provide good distributions while avoiding the volatility of the market, a perfect combination for many retirees. For example, a portfolio with a 20% allocation to real estate typically produces higher returns and lower standard deviations than a portfolio comprised of just stocks and bonds.
Even as long-term investments, these alternatives have often outpaced stocks and can be more defensive when the market takes a downturn. Retirees should consider including them as part of their portfolio.
Kristian L. Finfrock is the founder of and a financial adviser at Retirement Income Strategies. He is an Investment Adviser Representative of Kalos Capital and a licensed insurance professional. Kristian resides in Evansville, Wisconsin, with his two daughters, Kaitlynn and Kendra.
Kevin Derby contributed to this article.
There are material differences between the terms under which endowments and individuals can invest in alternative investments. These differences include but are not limited to commissions and fees, conflicts of interest, access to investment opportunities, size, investment time horizons and the ability to tolerate illiquidity. There is no standard or exact definition of the endowment model. Portfolio design, specific investments and ultimately performance vary considerably among endowments and investors. Kalos does not claim that any investor will achieve the same result as any endowment, institution or another investor. Kalos Investment Adviser Representatives have a conflict of interest when they recommend securities where they earn a commission as Registered Representatives of Kalos Capital. We address this conflict by disclosing the fees and commissions related to the investments recommended to our clients. Also, Kalos representatives do not earn both advisory fees and brokerage commissions on the same assets.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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