Investing for retirement is a vital topic for many people since they may be seeking to accumulate wealth or grow income in advance of their future retirement plans. However, since greater rewards typically involve accepting higher risks, investors must calculate their risk appetite and tolerance, which change over time.
Varied Sources of Retirement Income
An investor is likely to combine multiple origins of income in retirement. These sources could include income from Social Security, interest income, income from investments and interest, and possibly a traditional pension in addition to withdrawals from a retirement plan like an Individual Retirement Account or a 401(k). While Social Security payments may benefit from occasional cost-of-living adjustments in response to inflationary pressure, your pension income (if you have one) may not. If your investments are not keeping up with surges in the price of necessities, your retirement lifestyle could feel the pinch.
Inflation Proof?
No investment is impervious to market forces; all have risks. A recent discussion by Anne Tergesen in the Wall Street Journal dissected some of the common assumptions about good and bad retirement investment options. She confirmed the accepted belief that since 1926 (when data collection on this topic began), stocks overall have performed at a level to keep ahead of inflation. So even if you see a loss in value over a short period of higher inflation, you can expect the gains to even out over time.
Still, you can adjust your portfolio if you want to take action. Tergesen cites research that suggests a benefit to considering REIT funds. Real estate-focused funds may do well during inflationary periods, and REITs may also offer tax advantages. Since REIT distributions are taxable income, if the investor holds the shares in a qualified retirement account, they aren’t taxed on those distributions. Instead, the investor would later pay taxes on withdrawals from the IRA or 401(k) account.
How Does a REIT Work?
REIT is the abbreviation for Real Estate Investment Trust, a company that pools funds from a group of investors to generate income through ownership and operation of investment property. The shareholders have fractional ownership of the assets owned by the trust, which is managed by a sponsor and typically a master lessor. Most REITs own commercial real estate and are publicly traded, but other types instead buy mortgages and other financial instruments, and they can be privately offered. To qualify as a REIT, the company must follow these rules:
- Invest at least 75% of total assets in real estate or related financial instruments.
- At least 75% of gross income must come from real estate or related activities.
- The entity must distribute at least 90% of taxable income to the shareholders.
- The entity must have a board of directors.
- They must have at least 100 shareholders (after the first year of operation), and ownership concentration is limited.
Are REITs Risky?
Every investment has risks, and every investor perceives risk and reward through their own lens. Publicly traded REITs are considered liquid assets since they can be bought and sold on many exchanges, and anyone can participate, usually for a low minimum investment. That availability can also increase their volatility since they may follow swings in the broader market. Non-traded REITs may have lower volatility but may also be more challenging to value accurately. These are restricted to accredited investors and are considered illiquid investments.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
