We All Need Investment Income


 Interest rates have been extremely low since 2008, with a few years of slightly higher rates in 2017-2018.  This has created an environment than many investors have become accustomed to, turning to investments outside of fixed income for investment income generation.  Due to the events of the past year many investors are seeking income from their investments where they previously did not, creating a need to examine the income producing investments in their portfolio.

In the early 2000s and prior, income producing investments for many investors meant just a few things; bonds, CDs, and sometimes dividend paying stocks.  Due to the low interest rate environment that we have had for the past 12 years investors have been forced to look outside of the typical income producing investments to generate income from their portfolio.  Just how much income is needed from a typical investor portfolio?

The amount of income needed from an investment portfolio can vary significantly depending upon the income needs of each individual, however the percentages are much easier to discern.  According to recent research from Spectrem Group, 22 percent of investors receive income distributions from their investment portfolio on a regular basis.  Another 16 percent take income distributions when they need to.  Among retired investors the reliance on investment income is higher. Forty two percent of retired investors rely at least some upon investment income for their monthly expenses.

When considering how much of their monthly income is taken from investments, over a third of retirees indicate that over 30 percent of their monthly income needs to come from their investment portfolio.  Even working investors have some of their monthly income come from investments, with 9 percent having over 30 percent of their monthly income come from investments.

Given the percentage of income that is needed from investment portfolios, are investors concerned about generating retirement income?  Retirees are not that worried, with 88 percent not very or not at all worried according to Spectrem research.  Working investors are more concerned, with over a third being worried or very worried about generating income.  The younger the working investor, the more the worry, with half of Millennials being worried or very worried about income generation.

Worrying is something that many of us have become used to, but does that worry translate to delaying retirement?  Thirty percent of working investors are at least somewhat concerned that they will need to delay retirement due to the concerns regarding income generation from investments.  This concern is something that a financial advisor is ideally suited to helping alleviate.  Over half of investors look to their financial advisor as a source of information regarding ways to increase investment income.

What types of adjustments have investors made to increase investment income?  Among those investors who have made adjustments to their financial plan as a result of low interest rates, nearly half have invested more in equities.  Forty percent have invested more in higher yielding fixed income products, while 18 percent have increased their contributions to retirement plan accounts.  Nearly a quarter of investors have moved money from fixed income investments due to low interest rates.  That movement has been primarily towards equities.

Even though investors seek assistance and guidance from their financial advisors, they have ideas as to what they feel are the most ideal investments for producing income.  At the top of those ideas is dividend paying stocks, which is identified by 60 percent of investors as ideal for producing income.  Annuities and preferred stocks round out the top three investments investors feel are the best for producing income.

It is critical for investors to continue to monitor their investment portfolio and make adjustments when necessary to compensate for the low interest rate environment that is likely to continue for some time to come.  Partnering with a financial professional to discuss various options and become educated on other investment generating options will be key to generating income now and in the future.