Planning for retirement? Don’t count on Social Security meeting all of your financial needs. The federal program wasn’t designed to do so. You’ll definitely need other sources of income.
There are multiple things you can do to live comfortably during your retirement years. Some of them are less demanding than others. Here’s the easiest path to making at least $70,000 per year in retirement.
The hard part
Let’s first address the reality that there’s a hard part of this easiest path to generating significant retirement income. It takes money to make money. Unless you have an especially generous pension, you’re going to have to save quite a bit during your working years to supplement the Social Security income you receive when you retire.
The good news is that there are several ways to save that offer attractive tax benefits. Many employers offer 401(k) plans. You should, without question, contribute at least as much to your 401(k) plan as your employer matches.
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Another great alternative is an individual retirement account (IRA). Contributing the maximum amount allowed to an IRA (or as close to the max as possible) in addition to funding a 401(k) plan will go a long way toward ensuring you’re able to retire comfortably.
How much will you need to make $70,000 per year in retirement? The average Social Security monthly benefit is around $1,538. That translates to around $18,456 annually. Subtracting this amount from $70,000 leaves $51,544 per year that you’ll need to make in addition to what the average American will receive from Social Security.
Suppose you could somehow earn 7% annually. You’d need an initial investment of roughly $736,343 to make the additional amount needed on top of the average Social Security benefit to generate $70,000 in retirement income. The initial amount would be even less if you’re OK with eating into the initial amount over time.
The easy part
At this point, you might be tempted to throw your hands up in the air. Is it even possible to consistently make 7% returns per year? Actually, yes. This is where the easy part of the easy path to making $70,000 in retirement income comes into play.
There is a way to generate 7% returns that many people haven’t heard of. I think that it’s arguably the greatest passive income machine you’ll find. What is it? Closed-end funds (CEFs).
CEFs are a special type of mutual fund that can be bought and sold like a stock. In some ways, they’re more like an exchange-traded fund (ETF) than a mutual fund. But the real beauty of CEFs is that they’re laser-focused on producing income — often on a monthly basis.
Some CEFs specialize in bonds. Others focus on buying preferred stock with high dividend yields. Some sell covered call options to boost income. And while their distribution yields vary, many CEFs indeed pay out at least 7% per year.
For example, the AllianceBernstein Global High Income (NYSE: AWF) currently yields nearly 7.7%. This CEF invests mainly in corporate debt securities and government bonds.
Another CEF, Nuveen Preferred Securities and Income Fund (NYSE: JPS), invests in preferred stocks and other high-income securities. This fund’s yield is a little under 7.5% right now.
The Madison Covered Call and Equity Strategy Fund (NYSE: MCN) invests in large-cap and mid-cap stocks with reasonable valuations. The CEF sells covered calls on a majority of the stocks in its portfolio. Its yield currently tops 9.7%.
These are only a few examples. There are hundreds of CEFs available, many of which offer similarly attractive yields.
As with any investment, you’ll need to do your homework before buying CEFs. But the homework is relatively easy. Check out the expense fees of the funds to make sure they don’t reduce your returns too much. Buying CEFs that trade at a discount to their net asset values is also preferable.
Look at the historical performance of the CEFs. While your primary goal is income, funds that also appreciate over time are more appealing. Keep in mind, though, that no investment is risk-free. CEFs can experience temporary price declines.
Sure, you have to first do the hard part and consistently save for retirement. But if you do, generating $70,000 in annual income just might be easier than you expect.
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