5 Ways to Invest for Cash Flow With Your Retirement Savings
Generating enough income from your portfolio to live comfortably in retirement is a concern many retirees and pre-retirees worry about.
It’s a complicated conundrum. You don’t know how many years you’ll need to generate income, how the markets will behave, or exactly how much money you’re going to spend every year (especially as healthcare costs continue to rise faster than inflation rates).
And even if you did have a crystal ball that could predict exactly how much money you would need in retirement, building enough wealth to generate a moderate amount of income is tricky enough in today’s economic climate.
Therefore, you need a solid cash flow strategy for your future retirement.
To make that happen, it may be time to start thinking outside the Wall Street box and look toward alternative investments that historically have provided:
Higher returns
Higher appreciation
More options for generating income and positive cash flow
Retirement Income Vs. Retirement Cash Flow
But first, it may be necessary to rethink the whole idea of retirement “income.”
The truth is, most (if not all) of your income in retirement isn’t income in the sense that you’ve provided your time and/or skills in exchange for money. Because of this, many sources of your retirement “income” are dependent on conditions entirely outside your control, conditions such as:
Market performance
Company performance of businesses you’ve invested in
Inflation
Interest rates
And more
Additionally, some of the “income” you’ll use to pay for recurring expenses – such as needing a new car every 10-15 years in retirement – won’t be taxed as income by the IRS, thus falling outside the traditional definition of income.
For example, if you withdraw money from a Roth IRA to pay for a planned car purchase in retirement, your withdrawal won’t be taxed as income, as you already paid taxes on that money when you put it into your Roth account.
Enter the concept of cash flow.
Cash flow is the movement of money in and out of your accounts. You have positive cash flow when enough cash comes in every month to cover your expenses, no matter where that cash came from. You have negative cash flow if your monthly expenses are more than the cash you have coming in.
Thinking about your retirement income as cash flow rather than income allows you to be more flexible with your retirement income planning strategies.
Why You Should Invest for Cash Flow
Therefore, one cash flow strategy that’s becoming increasingly popular is to invest in assets that generate regular, fairly reliable revenue. When your portfolio is diversified amongst investments that consistently generate positive cash flow, your monthly income is not as beholden to volatile markets or company performance.
And when your portfolio is properly diversified, you can lean more heavily on cash flow assets that are doing well if others are performing poorly.
Likewise, this approach makes it easier to sell off poor investments and rebalance the portfolio to invest more heavily in assets that have appreciated.
5 Asset Classes to Invest in for Cash Flow
There are many types of assets known for producing positive cash flow for investors. As you learn more about your options, keep in mind that not every option is right for every investor. It’s important to do the proper research required to know what you’re investing in, why you’re investing in it, and what your obligations are for that type of investment.
Because of course, any type of investment – even those with historically high rates of return – has inherent risk.
1. Dividend Stocks
One of the more traditional assets investors use to generate positive cash flow is dividend stocks. Dividend stocks are typically offered by well-established companies that pay out regular dividends to their shareholders.
Well-established companies that offer dividend stocks have reached maturity. Mature companies know the best use of their earnings is often to return the cash to shareholders rather than re-investing to continue growing the company.
Dividend yields vary by company, so the percentages you earn often depend on the specific companies you invest in. If you want to invest in dividend stocks, you can invest in individual stocks or you can invest in dividend index funds that specialize in high-yield dividends.
And because these companies are so well-established, they are typically less risky investments than growth companies.
2. Rental Properties
Investing in real estate is another great way to generate income for positive cash flow. There are many avenues for real estate investments, but one of the best ways to generate consistent monthly income is to invest in long-term or short-term rental properties.
Long-term rental investors purchase single- or multi-family properties that they rent to tenants on a long-term basis. As tenants pay their rent, investors can reasonably predict and rely on the income they receive from rental payments every month.
On the other hand, not everyone likes the hassle of finding qualified long-term tenants. Hosting platforms like Airbnb and Vrbo make it easy for other investors to rent out vacation properties to short-term tenants and tourists with minimized risk to the property itself.
Of course, investors with rental properties are responsible for maintenance, upkeep, and the sometimes arduous task of finding qualified tenants unless they opt to hire a property management company. Hiring a property management company can make life easier, but it can also significantly eat into returns if not properly planned for.
3. Storage Facilities
Storage facilities are another great investment option to generate cash flow. In states like Texas and Florida, which are experiencing an inflow of tech industry companies and employees, storage facilities are in increasing demand.
For investors who like the idea of investing in real estate, but who don’t want to deal with needy tenants and expensive, time-consuming maintenance, purchasing and leasing storage facilities is a great alternative.
4. Farmland
Similarly, investing in farmland is another low-maintenance real estate investment alternative. Up until recently, only ultra-high-net-worth investors could afford to purchase and lease farmland. But today, platforms like FarmTogether and AcreTrader allow investors to pool funds and benefit from the cash flow advantages and historically high returns of investing in farmland.
Similar to other rental properties, farmland can be leased to farmers which then results in consistent lease payments to the investor. And like other types of real estate, vacant land or farmland may appreciate over time, affording the investor opportunities for significant capital gains if and when they decide to sell the land.
5. Peer-to-Peer Lending
Finally, peer-to-peer (P2P) lending is another way to invest your savings and generate positive cash flow. There are many online platforms today that connect investors with qualified borrowers. Some platforms offer secured P2P lending, while others offer unsecured lending, which is more common. Likewise, most P2P investment platforms are not federally insured.
Depending on the platform you use, P2P lending can be more or less risky in different ways. Although return rates for P2P lending are fairly high, the industry itself is young in the fact that it’s much easier to become a P2P lender with online platforms. As with all types of investments, it’s important to do your research and know the risks.
Invest for Cash Flow with a Self-Directed IRA
There are many options to invest in assets that generate cash flow (and this is certainly not a comprehensive list). What you invest in is entirely up to you – your familiarity with the asset class, your willingness to invest your time and research in an asset class, your risk tolerance, and more.
Here’s the fun part: you can still invest in these alternative assets with retirement savings that are sitting in tax-advantaged accounts like a 401(k) or regular IRA. The way to do this is with a self-directed IRA. To determine if a self-directed IRA is right for you, check out our previous article on the subject.
At Chicago Trust Administration Services, we are experienced custodians of self-directed IRAs. We help investors make the investment deals they want while staying compliant with IRS regulations. If you have questions about using a self-directed IRA to invest in alternative assets that generate more consistent positive cash flow, 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.