How to Make Money in Retirement Without Working

Retirement means no more work - at least no more 9-to-5, 50 weeks a year with a brief vacations, commute-type of work. But some folks reach retirement and need a little extra to pay the bills - or to fund the fun stuff. There are money-making options in retirement that don't involve getting a job.

NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: What are the safest money-making opportunities for retired folks who may need their savings in the next five to ten years?

A: A job… consulting or pursuing a full- or part-time job is your best bet if you are willing and able to work. However, that means you won't necessarily be "retired" anymore, so let’s consider several broad categories of normal investment options that a retiree’s choices might include. And because we’re dealing with a retired person, I’m going to travel the more conservative route primarily for “preservation of capital” purposes with emphasis on liquidity.

Simple Savings

First, if you’re anticipating a specific need by some relatively specific date, then a simple savings account (including that Rainy Day fund money) might be a viable option for a portion of your portfolio. To further enhance the yield of this very conservative approach, CDs might be part of the cash or near-cash mix – but CDs have obvious downsides, including penalties for early withdrawals, and should interest rates rise during a CD’s term, you’re not in a “without penalty” position to capture the higher rates that a more flexible savings account offers.

Bond Index Funds

For potentially greater yet still conservative yields, you might consider bond index funds. More risk, certainly, but since that long-ago 1930’s Depression era, the “average annual yield” of 10-year U.S. Treasury bonds has approached 5%. However, despite the safety of government-backed Treasuries, those annual rates have vacillated from a high of 33%, to a low of -11%. Therein lies the risk… not loss of capital, but the possibility of bad timing. A bond ladder could moderate some of this timing risk.

Another bond consideration might be Treasury Inflation-Protected Securities (TIPS). Unlike other treasury securities, TIPS pay interest and additional principal to compensate for inflation over periods of 5, 10 or 30 years. Annual inflation adjustments are based on changes in the consumer price index (e.g., the percentage change in the value of the security is added to the principal value, rather than being paid out like interest). And upon maturity, the bondholder is paid the higher value based on the CPI. A caveat is that the value of a TIPS could also drop in the event of deflation. And due to the inflation adjustment, TIPS pay lower interest rates than other Treasury bonds of comparable terms, but the inflation adjustment can produce more attractive results.

Stock Index Funds

As mentioned in previous blogs, I’m a proponent of stock index funds. Not necessarily an “all-in” position for the 5-to 10-year medium term we’re discussing here, but still, investing a meaningful portion of the portfolio to provide an opportunity for some enhanced upside. Yes, like bond index funds, the risk here is an ill-timed loss, just when you’re needing the money, but records indicate that since just before the Great Depression, the average annual return of the S&P 500 has been around 9.65%, the caveat being that although the highest annual return was a hefty 52.56%, the lowest was a mind-boggling -44%.

And the index fund option brings to mind the use of Target-date funds, those popular “all-in-one” mutual fund of funds that provide a highly diversified, age-based mix of stocks and bonds (including international exposure if that appeals to you).

In Sum

Considering the full range of the aforementioned options, if you desire to take a more conservative approach, shift some (or all) of the stock allocation options to bonds and some (or all) of the bond allocation options to savings accounts or CDs. But if you’re inclined to be more aggressive, shift some of the suggested bond allocation to stocks.

I personally like the idea of investing in highly-diversified index funds, and in this mid-range scenario, lean toward Target-date funds, which are periodically reallocated for you.