There are two primary ways to self-fund a retirement. 1) Live off of the output from income-producing assets. 2) Drawdown retirement savings by selling investments.
My retirement strategy is to combine both methods to diversify my retirement income streams.
By spending money from income-generating assets first, I’ll reduce the amount I need to sell in retirement accounts to cover living expenses.
Reducing and delaying drawdowns from retirement accounts allows those balances to grow larger over time.
What attracts me to income-producing assets the most is that you don’t need to sell them for retirement income — they generate income and preserve wealth.
Wealth preservation comes in handy if you outlive your life expectancy or want to leave money for your family.
In this article, I’ve highlighted the types of investment assets that work best for this strategy.
What are Income-Producing Assets?
Income-producing assets are investments that pay you while you hold them. Dividend stocks, bonds, and many real estate investments all pay investors while they hold the assets in their portfolio.
Not all assets are income-producing. Your home, for example, doesn’t pay you while you own it (unless you rent part of it out).
Precious stones, gold, silver, commodities, and cryptocurrencies are assets that don’t generate income either.
The benefit of owning income-producing assets is you can earn income streams without working a nine to five job. Many of these assets are passive income streams.
The main downside is that the government taxes investment income not held in tax-advantaged accounts.
One way to avoid or reduce taxes on investment income is to invest in growth assets. Growth assets are investments held for capital appreciation. The most common is a growth stock.
Facebook, for example, is a growth stock because the company’s objective is to increase its share price for investors. It does so by reinvesting profits back into the business instead of paying a dividend. There’s no tax on your investment until you sell at a profit.
Though investment income is taxed, the tax rate on most dividend income is lower than earned income.
The Best Income-Producing Assets for Retirement
Each of these items varies in risk, income potential, diversification, taxation, and fees. I’ve created a table for you to sort based on your priorities.
I’ve ordered the list loosely by grouping major asset classes together: equities, cash, fixed income assets, and property. Each item is a variation of how you can invest in an asset class.
Click the table links for each item to read more and find examples of each asset type. Or scroll past the table to read on.
Note: I assembled this table as a way to compare and sort the different attributes of each income-producing assets. Use this list to help determine what types of investments are right for you. Highlight the column header for a description and sort to your liking. I used the ratings of low, medium, and high as a way to group and sort. Your opinions of each rating may differ from mine.
Note: Example funds below are not a recommendation to buy. Please perform due diligence to achieve your specific objectives. Some of the links on this page are from our partners.
1. Dividend Stocks
Dividend stocks are one of the most manageable assets to own. All you need is money to invest and an online brokerage account, preferably one with no commissions and favorable dividend reinvestment options.
But to build a sustainable portfolio, you need to perform due diligence on every potential investment and consistently monitor your holdings.
The goal of building an income-generating dividend stock portfolio is to grow dividend payments, and the total balance every year. Beating the market is a secondary objective.
With a diversified portfolio, you receive predictable quarterly income and the likelihood of price appreciation over time.
Dividends can be held in tax-advantaged accounts to avoid dividend taxation.
I’ve owned dividend stocks since 1995 when my uncle gifted me one share of Chevron in a DRIP account. I buy dividend stocks with the intent to hold well into retirement so I can utilize the stable income stream and maintain and grow my net worth.
2. Dividend-Focused Funds
For those who want the utility of dividend stocks but don’t have the time, skill, or desire to perform the required research, several mutual funds and ETFs are available for investment.
These funds target higher-yielding equities that provide an aggregate yield that’s greater than the market indexes.
The Schwab U.S. Dividend Equity ETF (SCHD), for example, yields about 4% compared to the S&P 500 Index (SPY), which yields about 2.15% (both net of fees, 05/04/2020).
Since dividend stalwarts are often larger companies in more mature industries, dividend funds and ETFs often have a lower beta than the overall market, meaning they are less volatile. The Vanguard Dividend Growth ETF (VIG), for example, has a beta of 0.89, compared to 1.0 beta of the S&P 500 index (SPY).
The specific objectives of each fund vary. Pay attention to the fees and top holdings to ensure a fund is right for you.
Example funds: SCHD, VIG, FDGFX, VDIGX, DVY, NOBL
3. Market Index Funds
Index investing (i.e., passive investing) has grown tremendously since the 1970s. The recent popularity of index funds can be attributed to consistent outperformance compared to managed funds (net of fees) over long investment horizons.
When you hold an index fund or ETF, you own all the stocks in a particular index, in alignment with its weighing. Since many stocks in the major indexes pay dividends, you will receive dividends (and sometimes capital gains) by owning index funds.
However, yields are lower than dividend-focused funds because many stocks do not pay dividends.
Index funds are excellent investment vehicles for everyday investors looking to match the index returns. But the lower yields require more significant account balances to generate the same amount of income as a dividend-focused fund or diversified portfolio.
Example funds: FSKAX, VTI, VTSAX, IWM, SPY
4. High-Yield Cash Savings
Cash is the most liquid of all assets. But it’s also is an income-producing asset, paying you interest as it sits idle in your account.
Unfortunately, most checking and savings accounts pay meager interest rates below the rate of inflation. So your money is likely to lose value against inflation while other asset classes grow.
While sitting in an account, it might as well earn a high interest rate.
Though savings rates have dropped significantly over the past year, you can still earn 1.5% or more in a high-yield savings account or money market.
Recommended: Compare high-yield savings accounts
5. CD Ladders
Certificates of deposit (CDs) are similar to high-yield savings and money market accounts. However, they are less liquid, depending on the terms of the CD. You may pay a penalty for early withdrawal.
CDs are available in terms of one month to five years or more. Shorter terms carry low interest rates. But the longer the term, the higher the interest rate.
One strategy to take advantage of higher interest rates while maintaining liquidity is to create a CD ladder.
Let’s say you have $100,000 of cash that you want to start earning interest. Instead of putting all of that money into a five-year CD, you split it evenly and buy five different CDs.
- $20,000 – 5-year CD
- $20,000 – 4-year CD
- $20,000 – 3-year CD
- $20,000 – 2-year CD
- $20,000 – 1-year CD
The short-term interest rates will be lower than the five-year rate, but you’ll have better access to the cash. After the first year, you can withdraw the first $20,000 and spend it or buy a new five-year CD at the back end of the ladder.
Recommended: Best CDs account options
6. Municipal Bonds
My Dad was recently looking to deploy some accumulated dividends in his taxable brokerage account. After some research and discussion, we decided to purchase a municipal bond ETF to reduce his tax burden and diversify his income portfolio.
Municipal bonds are debts issued by municipalities to fund infrastructure investments. States, cities, counties, and townships need to make long-term investments in their communities, but often don’t have the tax revenue to fund the improvements.
The solution is to issue bonds.
Online brokers and advisors have tools to help select municipal bonds to meet your investment objectives. However, I prefer ETFs and mutual funds to have exposure to a diversified basket of yields, terms, and geographies.
Example funds: VTEB, MUB, FTABX, VWITX
The U.S. Government issues Treasury notes, bills, and bonds to fund the annual deficit and stimulus spending. Investors in the U.S. and around the world purchase the notes.
Debt issued by the government is considered to be a near risk-free asset, meaning there’s little chance of default. Thus, treasuries are secure and reliable income-producing assets for retirees.
Unfortunately, during the past decade, treasury yields have decreased significantly. Nonetheless, most retirement investors have some money allocated to government bonds to diversify assets and income streams.
You can buy treasuries through a full-service online broker, directly from the Treasury, or through mutual funds and ETFs for ease and diversification (my preference).
Example funds: SHY, BND, VGLT, TLH, IEF, FUTBX, VUSTX
Buy Direct: TreasuryDirect
8. Corporate Bonds
More than 95% of companies in the S&P 500 have long-term debt on their balance sheets. Companies use debt for many reasons, including capital expenditures, acquisitions, working capital, and even to pay for dividends.
When debt is inexpensive, it may be in the best interest of the company to use leverage to foster growth. Finding the optimal balance between debt levels and growth is why CFOs make the big bucks.
All of that corporate debt is investable through the ownership of corporate bonds. Debt quality ranges from AAA down to junk bonds. Higher ratings mean lower risk and returns.
The quality of debt depends on the financial strength of the company. Debt rating companies such as Moody’s and Standard & Poors determine the creditworthiness of businesses.
The benefit of owning corporate debt is investors can purchase a diversified portfolio of assets in varying industries, grades, yields, and geographies. Funds and ETFs are the easiest way to own these assets and diversify.
Example funds: SPBO, LQD, VTC, FCBFX, VLTCX, JNK
9. Balanced Mutual Funds
Balanced mutual funds combine stocks and bonds into one fund, helping to simplify asset allocations for some investors.
These funds typically hold between 40%-60% each of stocks and bonds, and also may have exposure to money markets.
Age-based funds, aka target-date funds, which have become more popular in the past two decades, are a type of balanced fund. The manager adjusts the stock to bond ratio as the target date approaches, keeping an appropriate asset allocation for investors.
Fund examples: VBIAX, FBALX, SWOBX, FFFEX, VTHRX
10. Real Estate Rental Properties
Rental properties are one of the best wealth-building assets over long periods. Rentals provide steady income and appreciate over time. They are also tax-efficient, giving the investor several ways to avoid and defer taxes.
On the downside, rental properties can be headaches from time to time. You can hire a manager, but they eat into profits. You’ll always be on the hook for repairs and decisions, and be at risk for long-term vacancies. High-quality properties in great locations make the best investments.
The key to profitable rental properties is to buy properties well below market rates. It’s easy to overpay for a rental, so read as much as you can about evaluating investment properties before your first purchase.
Turnkey services such as Roofstock can help to identify existing rental properties with predictable cash flow in profitable locations.
I was a landlord for about eight years but sold my rental property because it was a lousy investment property. If the 2020 recession creates opportunities, I may consider getting back into real estate investing.
11. Short-term rentals
Property owners are turning to Airbnb to host short-term rentals to increase the income potential of their real estate. Basement suites, carriage houses, and homes in desirable tourist destinations all make for excellent short-term rentals (assuming no global health crisis).
However, you must be able to stomach renting your property to strangers, and managing the schedule and regular cleanings.
For someone who already owns the right kind of property in a good location, becoming a short-term rental host may be a good option to generate retirement income with minimal effort and risk.
12. Traded REITs
The easiest way to gain investment exposure and income from real estate is to buy real estate investment trusts (REITs) through your online brokerage account.
REITs are regulated companies that are required to pay out at least 90% of taxable income as dividends to investors if the bulk of its assets and income are connected to real estate investments. These companies own commercial, retail, and industrial real estate properties.
REITs usually have higher yields than most blue-chip dividend stocks, but dividends are taxed as ordinary income (same rate as your paycheck). Dividends from most other companies are taxed at the capital gains rate (15% for most people).
Another downside of traditional REITs is they are traded on an exchange. Though this makes them easy to buy and sell, the price fluctuates with the market. In a down market, you may lose capital. We see this today, thanks to the health crisis.
Example stocks and funds: VNG, O, SPG, PEAK, PSA, FSRNX
13. Real Estate Debt
Another way to invest in real estate for income is to loan money to investors. Investors looking to flip a property or do a cash-out refinance sometimes need short-to-medium term loans to accomplish their desired outcomes.
It’s often easier and more cost-efficient to assemble a group of independent investors instead of going to a bank.
Real estate debt investments require some knowledge of real estate investing. It’s also helpful to have real estate investors in your network so you can find syndication deals.
Since these kinds of deals aren’t regulated, these investments are best for higher net worth individuals (accredited investors).
Investing in real estate debt has become simpler and more widely available with the growth of real estate crowdfunding.
I invest in real estate debt on the PeerStreet real estate crowdfunding platform, where diversified debt deals are easy to access for a $1,000 minimum investment. Other crowdfunding platforms offer debt deals with higher minimums.
14. Non-Traded REITs
Not all REITs trade on an exchange. Non-traded REITs operate similarly as traded REITs, paying out a large portion of profits. However, due to security regulations under crowdfunding laws, REIT funds are capped at $50 million.
To sufficiently diversify, fund managers buy several small to mid-sized properties until reaching the $50 million limit. Once capped, they create a brand new fund.
Unlike traded REITs, non-traded REITs tend to focus more on multifamily apartments and smaller commercial properties. Exposure to this investment class was more difficult until the onset of real estate crowdfunding.
The benefit of non-traded REITs is they are regulated, but not subject to daily market fluctuations. So the value of your investment is more stable. This also allows the managers more discretion when finding new investments.
I’ve been investing at Fundrise since 2017. See my returns here. Non-traded REITs are available to accredited and non-accredited investors.
One note about Fundrise and most other crowdfunded real estate investments, there is limited liquidity. Your money may be tied up for a year or more. Only invest capital with a three-five year investment horizon.
One of the more exciting income-producing assets for individual investors is actually quite dull and old-fashioned — farmland. With all the stock market volatility, farmland may be a good investment for accredited investors looking to diversify outside of the stock market.
It takes a lot of capital to purchase farmland in the traditional sense. But a relatively new investment platform called AcreTrader has made it possible for regular investors to buy small slices of land through crowdfunding.
The details of each deal are unique, but most of these land investments aim for both capital appreciation and annual distributions. So you can collect the income while the land appreciates over time.
Deals have a five to ten-year investment horizon, so only invest money you don’t need for many years. For now, the platform is illiquid, but they may add liquidity windows or a trading platform in the future.
AcreTrader claims that farmland has returned 11.5% annually since 1990. Most projects are row crops such as almonds, corn, and soybeans, and some have the potential for wind or solar farming as well. Yields range from 3%-5%.
16. Passive Business Ownership
If you own and run a business, you probably aren’t retired yet. However, some retirees may maintain ownership from a previously run business, or decide to become passive investors in new companies as a source of retirement income.
Equity ownership of a business entitles you to a portion of the profits under the ownership agreement.
A friend of mine inherited a business from his Dad. His Dad no longer helps run it, but still collects a share of the profits as part of the ownership transition plan.
Continued ownership can be a low-risk investment if it’s an established business with healthy cash flow and good management. But investing in new businesses can be a risky endeavor.
Only invest if you can afford to lose the money, and make sure to hire an excellent attorney to ensure a proper agreement is in place.
17. Business Debt
Instead of taking ownership of a business, loaning money is another option. Small businesses often need loans to acquire equipment or inventory, and the process of getting a bank loan can be arduous.
Business owners often turn to family members for support. Whether you’re loaning to a friend, family member, or stranger, an iron-clad agreement that spells out the good and the bad scenarios is critical.
A few online platforms have sprung up in the past few years that enable investors to loan money to small businesses. These include StreetShares and Worthy Bonds, both of which sell business bonds and pay investors a flat 5% interest rate.
Recommended platform: StreetShares
18. Fixed Annuities
I’m not a big fan of annuities. You can create lifetime income yourself with a better return on your money. However, annuities can be a useful financial planning tool.
There’s a dizzying array of annuity types. If someone ever tries to sell you a variable annuity or another type annuity servicing as an investment product, but very cautious. Fees on annuities are the most difficult to understand.
The only option I would ever consider or recommend to a family member is a fixed annuity. When you buy a fixed annuity, you’re purchasing a guaranteed future stream of income for a price paid upfront.
The issuer assumes the investment risk of the money you give them, and pays you guaranteed monthly income for a stated period — often, for life. Shop around and make sure you understand the fee structure before considering a purchase.
Conclusion – Best Income-Producing Assets
Well, there you have it. I hope this list is helpful to some of you who are either in or approaching retirement and looking to invest for income.
Thanks to a reader named Edward, who reached out with a question about buying income-producing assets in his 70’s. Your email helped to inspire this post and challenged me to dig deeper into the many options out there.
I appreciate hearing from readers, especially when your emails inspire new content! Get in touch here.
Featured photo via DepositPhotos used under license.