Planning For An Interest-Only Retirement Fund

Retirement - the time to finally take up those hobbies you’ve always wanted to, travel to your dream destinations, and most importantly, relax. However, to do those things, you need to have saved up a retirement fund. If your previous job didn’t offer a retirement fund, you have to rely on your savings. So, how do you, in theory, ensure you don’t outlive your assets by living off of your savings? Setting yourself up for an interest-only retirement plan is an option to consider to preserve your savings. 

What is an interest-only retirement plan? 

An interest-only retirement plan is strictly focused on generating sufficient passive income solely from interest earnings for retirees to live off by relying on a defined principal balance to create that income. This means retirees will need to invest their savings to generate a passive income. The key to this strategy is the principal balance must remain stable to generate a consistent return. This type of retirement plan will guide retirement savers to calculate the amount they need to save to then help them gauge their finances in retirement. The major benefits of an interest-only retirement plan are that it tends to be more stable - it is usually not tied to market fluctuations - and it is easy to liquidate. 

How much money do you need to live off investment interest?

There is no single dollar amount that will work for everyone. Individuals will first need to calculate how much income they need to live off before determining what dollar amount and investment strategies will get them to this required income. The following expenses may be part of one’s expected retirement budget:

  • Housing
  • Transportation
  • General Living Expenses
  • Medical / Health Insurance
  • Taxes
  • Misc. Expenses such as travel and entertainment

It’s always important to consider and plan for an emergency fund. As you age there are always increased risks of any emergency expenses that could arise and they shouldn’t be calculated as part of your general living expenses. These emergency expenses can include issues to your health, but they can also include car and house repairs, emergency travel, etc. It is also important to consider inflation as you plan for your retirement. On average, the annual rate of inflation in the U.S. is 3.8%. Only considering the current market rate does not take into account future price hikes, therefore, you will end up tapping into more of your savings and losing money in the long term.

Income source – Income source is a very important aspect of your retirement fund that provides you with a passive income source. You need to opt for an investment portfolio with good returns and low risk once you retire, as you can’t afford high-risk investments, and even minimal risk should be taken with caution. There are several investment options like fixed-income bonds, deposits by banks, and other reported financial institutions that are known for low-risk profile investments, however, the interest rates have become considerably low over the decades. 

Is it a good idea to try to live off interest-only investments, since interest rates are subject to market fluctuation?

In recent years, banks have been paying less than 1% interest on savings, CDs, and money market accounts. Government bond interest rates are not much higher either, averaging only between 2% to 3%, while private bonds vary more depending on the quality. Corporate bonds can pay upwards of 30-40%, but these are considered to be high-risk investments. Because rates are subject to change depending on the market, it is a good idea to have a diversified portfolio that can include a mix of these strategies along with fixed-interest rate investments. Having a diversified portfolio makes an interest-only retirement plan viable, but may not work for everyone. It is always best to discuss your plan with a qualified adviser. 

Let’s take a look at an example of a retiree who has invested $1 million or $2 million at a conservative rate of 1%:

  • $1 million x .01 = $10,000 annually would equate to $833 monthly income
  • $2 million x .01 = $20,000 annual would equate to $1,667 monthly income

Let’s say these same dollar amounts were invested but at a higher rate of 6.5% with a 12-month Connect Invest Short Note:

  • $1 million x .0.065 = $65,000 annually would equate to $5,417 monthly income
  • $2 million x .0.065 = $130,000 annually would equate to $10,833 monthly income

What are the best strategies to build an interest-only retirement account?

As mentioned, before determining how you will invest your saved capital, you must calculate the dollar amount you will be comfortable living off of in retirement. When building an interest-only account, there are key factors you should understand as they will impact your returns and can help assist you with determining your investment blend:

  • Risk tolerance - low-risk investments will generate more stable returns but at lower rates, while high-risk investments can significantly fluctuate and can potentially generate high returns, you can also be subject to significant losses.
  • Investment terms - with most investments, you can expect to earn lower rates for shorter terms and higher rates for longer terms

Do your due diligence on what type of income-generating investments are available along with the expected returns. It is essential to consider the risks associated with each investment type as you are counting on the invested principal to generate your retirement income. If you are unsure about how to get started, seek help from a professional financial advisor. Income-generating investments include, but are not limited to, the following:

  • Alternative fixed income investments
  • Savings accounts
  • Bank CDs 
  • Short-term and long-term government-backed bonds
  • Municipal bonds
  • Corporate bonds 

When considering which types of investments to add to your portfolio, you must also consider the amount of time you have before retirement. The more time you have before retiring, the more flexibility you have to make riskier investments, whereas, if retirement is nearing for you, it may be better to invest in more stable opportunities, even if the rate is lower. As previously mentioned, the monthly income needed to cover one’s expenses will vary from person to person, but retirees should seek opportunities that will maximize their return while keeping the principal stable. It is in your best interest to diversify your investment portfolio and put a fraction of your savings in investments with higher rates to help you reach your goal.

Connect Invest offers short note investments, an alternative investment option to help you produce passive, fixed-income for your retirement fund. Our investments allow for short terms, high-yielding returns, and low minimum investment requirements, and the principal amount stays stable. Learn more about Connect Invest’s short notes and start investing with Connect Invest today.

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