Playing for retirement? Don’t rely on Social Security to meet all of your financial needs. The federal program was not designed for that. You will definitely need other sources of income.
There are several things you can do to live comfortably during your retirement years. Some of them are less demanding than others. Here’s the easiest way to earn at least $70,000 a year in retirement.
The hard part
Let’s first address the reality that there’s a hard part to this easiest path to generating significant retirement income. It takes money to make money. Unless you have a particularly generous pension, you will need to save a little during your working years to supplement the Social Security income you will receive in retirement.
The good news is that there are several ways to save that offer attractive tax advantages. Many employers offer 401(k) plans. You should, without a doubt, contribute at least as much to your 401(k) plan as your employer matches.
Another great alternative is an Individual Retirement Account (IRA). Contributing the maximum amount allowed to an IRA (or as close to the maximum as possible) in addition to funding a 401(k) plan will go a long way to ensuring that you can retire comfortably.
How much will you need to earn $70,000 a year in retirement? The average monthly Social Security benefit is about $1,538. This translates to approximately $18,456 per year. Subtracting that amount from $70,000 leaves you with $51,544 per year that you will need to earn in addition to what the average American will receive from Social Security.
Suppose you can somehow earn 7% per year. You would need an initial investment of around $736,343 to get the extra amount needed on top of the average Social Security benefit to generate $70,000 in retirement income. The original amount would be even less if you are okay with eating into the original amount over time.
The easy part
At this point, you might be tempted to throw your hands up. Is it even possible to consistently make 7% returns per year? In fact, yes. This is where the easy part of the easy path to earning $70,000 in retirement income comes in.
There is a way to generate 7% returns that many people have not heard of. I think this is arguably the best passive income machine you will find. What is that? Closed-end funds (CEF).
CEFs are a special type of mutual fund that can be bought and sold like stocks. In some ways, they are more like an exchange-traded fund (ETF) than a mutual fund. But the real beauty of CEFs is that they are geared towards generating income – often on a monthly basis.
Some CEFs specialize in bonds. Others focus on buying preferred stocks with high dividend yields. Some sell covered calls to increase their income. And while their payout yields vary, many CEFs do in fact pay out at least 7% per year.
For example, the AllianceBernstein Global High Income (NYSE: AWF) currently yields nearly 7.7%. This CEF invests primarily 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. The yield on this fund is currently just under 7.5%.
The Madison Covered Call and Equity Strategy Fund (NYSE:MCN) invests in large and mid capitalization stocks at reasonable valuations. The CEF writes covered call options on the majority of the stocks in its portfolio. Its yield currently exceeds 9.7%.
These are just a few examples. There are hundreds of CEFs available, many of which offer equally attractive returns.
As with any investment, you will need to do your homework before buying CEFs. But the homework is relatively easy. Check the fund’s expense charges to make sure they don’t reduce your returns too much. Buying CEFs that are trading at a discount to their net asset value is also preferable.
Look at the historical performance of CEFs. Although your main objective is income, funds that also appreciate over time are more attractive. Keep in mind, however, that no investment is without risk. CEFs may experience temporary price drops.
Of course, you have to do the hard work first and systematically save for your retirement. But if you do, generating an annual income of $70,000 might be easier than expected.
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Keith Speights has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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