There are several different ways to generate cash from an investment portfolio to top up your retirement income. Many retirees make the mistake of confusing cash with income and this leads them to invest in interest-bearing investments such as bonds and term deposits to supplement their superannuation. Yet interest is only one of the ‘four pillars’ of retirement income. These four pillars are:
Interest. The advantages of investing in interest-bearing investments are that you know with certainty what your income will be and, providing you invest in securities with a good credit rating, there is little risk to your principal. However, interest is taxable and returns are low.
Dividends. There are a number of listed shares which have a high dividend pay-out at a consistent rate. A carefully constructed share portfolio can produce dividends which provide at least as good a return as bank interest, with the added advantages of imputation credits and the possibility of capital gain over the long term.
Capital gains. For most long term investors, capital gains are not taxable. A diversified portfolio of shares can produce a high return over the long term. Cash is generated by simply selling off holdings from time to time. You will need to reserve some of the capital gains for times when the markets drop.
Principal. During the course of your retirement you should plan to reduce your investment capital. If you don’t spend it your kids will! One way to do this is to purchase a variable annuity, or you can simply plan to cash up a percentage of your principal each year. A rule of thumb is to draw down 5% per year.
With interest rates at a low level, it is important to consider other ways to generate cash which can potentially provide a higher return.