Why Early Retirees Should Invest in Income-Producing Assets

Early retirement has become a priority for younger generations like millennials and Gen Z, and they have decades to plan for that dream. But in 2020, the coronavirus pandemic caused millions of older workers to exit the workforce earlier than originally planned. In many cases, some of these early retirees were forced into early retirement involuntarily. 

According to a recent report published by Goldman Sachs, a total of 5 million people left the labor force during the pandemic, 3.4 million of whom were over the age of 55. 2.5 million of those who left do not plan to return to work. More than half of that 2.5 million would not have chosen to retire in 2020. They were either forced into early retirement due to job loss or made the difficult decision to retire early due to other pandemic pressures.

For example, many older workers had concerns regarding the ongoing health risks associated with the pandemic and decided that going back to business as usual wasn’t worth it. Others found themselves experiencing a surge in asset values both within their stock portfolios as well as real estate holdings and decided to take their chances. 

Miguel Faria Casto, a senior economist at the St. Louis Fed, calculated that the, “real net worth of Americans age 55-64 rose by 14.2% between the fourth quarter of 2019 and the second quarter of 2021.” For those who experienced a significant increase in overall net worth during the course of the pandemic, the decision to retire early may have seemed the obvious option.

In the event that you have found yourself among this group, you likely have looked over your retirement plan through a new lens. Investing in a diversified stock portfolio over the course of a 40-year career may have sufficiently financed a 30-year retirement horizon, but adding 5-10 years to that timeline due to early retirement will have skewed those figures. 

When 30 years becomes 35 to 40, looking beyond dividend-paying stocks and purchasing additional income-producing assets could provide the higher return needed to ensure that your retirement will be sufficiently funded and provide the comfort that you intended and deserve.

Investing in Income-Producing Assets For Early Retirement

A diversified portfolio of stocks, bonds, and money market funds is usually where you start your journey in investing for retirement. These types of investments are a great way to put the money you’re saving to work and build more wealth.

However, inflationary concerns and longer retirements mean that returns from stocks and bonds are no longer quite enough to fund a secure retirement. To generate cash flow, retirees often have to sell their holdings when they take income distributions from their retirement savings, causing them to miss out on future growth potential or deplete their nest egg too quickly.

Luckily, those who walked away from their careers before full retirement age have options. One of those options is to use a portion of your retirement savings to purchase income-producing assets. Income-producing assets have the ability to generate cash flow even as you hold them, and many of them have just as high (or higher) return potentials than traditional securities.

What Are Income-Producing Assets?

Income-producing assets are assets that provide cash flow while you own or hold interest in them. While stocks, bonds, ETFs, and mutual funds usually appreciate in value the longer you hold them, they often have to be sold in order to produce cash flow. Some examples of income-producing assets that produce cash flow even as they appreciate are:

These types of income-producing assets have different characteristics than conventional assets. They tend to have high minimum investments, are more complex in structure and compliance requirements, and are often more illiquid than their traditional counterparts, but they produce cash flow on a consistent basis. 

Of course, some of those characteristics disqualify investors from participating or scare them away from doing so. But for those who have available capital, are willing to venture into unknown territory, do their research and due diligence, and hire the right professionals to help them navigate the waters, the payoff can be well worth it. 

Increase Diversification With Income-Producing Assets

The importance of diversification is no secret. Ensuring that your portfolio is properly allocated to include a variety of financial instruments across a breadth of industries helps to minimize your risk. Although every investment inherently poses a level of risk, diversification helps mitigate some of that risk by making sure all of your eggs aren’t in one basket.

Every financial advisor will stress the importance of diversification in their clients’ portfolios. What they may not do is help you invest in and diversify income-producing assets outside of your conventional portfolio. (This is because they’re often only licensed to sell traditional securities such as stocks, bonds, mutual funds, and ETFs.)

Holding a variety of asset classes like the ones mentioned above can further protect you against crippling losses due to market volatility. Events that negatively impact the stock market are unlikely to have the same impact on real estate, for example. Many nontraditional assets tend to move counter to stocks and bonds markets, meaning they will not be subject to the same market fluctuations.

Moving from a strategy composed solely of stocks and bonds to one with several additional income-producing assets can help to further diversify your portfolio and improve the outlook for involuntary early retirees. Although research requirements increase, regulatory environments change, and compliance and tax implications become more complicated, you can navigate all of these challenges with guidance from the right professionals. 

Purchasing Income-Producing Assets Through A Self-Directed IRA

If you decide to expand your investments into a larger portfolio including additional income-producing assets, you’ll need the right account to do it. A conventional IRA or 401k is usually limited in that it won’t allow for the purchase of asset classes outside of approved securities — stocks, bonds, ETFs, and mutual funds.  

Non-traditional asset classes like the ones we mentioned above can be purchased through a self-directed IRA. These types of accounts do require more oversight by the investor than a traditional IRA and are not necessarily the right choice for all investors. However, having more control and a wider range of opportunities to build wealth will be worth it for many investors.

How Chicago Trust Administration Services Can Help

At Chicago Trust Administration Services, we’ve been helping investors self-direct their futures for over 17 years. If you are ready to start investing in alternative income-producing assets through an SD-IRA, the team at CTAS is ready to help. To start the conversation and get your questions answered, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.


Steven Miszkowicz