High-Yield Investments
for Retirement
Higher yield can be appealing. But yield is only one part of the picture.
For retirees and those approaching retirement, investments offering higher potential income may seem attractive. But higher yield can also involve additional risks, costs, complexity, or reduced liquidity. Understanding those tradeoffs can be an important part of evaluating whether an investment fits within your broader retirement strategy.
What Does
“High Yield” Mean?
The term “high yield” can sound straightforward, but it does not describe one specific type of investment.
In general, a higher yield refers to an investment offering a higher level of income or interest compared with other available alternatives. That additional yield, however, may come with additional risks, costs, complexity, or other tradeoffs.
For someone approaching or living in retirement, understanding where the yield comes from — and what is being accepted in exchange for it — can be just as important as the amount of income an investment may generate.
Why Can a Higher Yield
Come With More Risk?
A higher potential yield may reflect additional risks that investors are being compensated for taking. Understanding those risks is especially important when the money may be needed to support retirement income.
Credit & Default Risk
Some investments offer higher yields because the issuer may carry greater credit risk. There may be a greater possibility that an issuer cannot make required payments.
Market Risk
An investment may generate income while its market value changes. Selling during an unfavorable period could result in a loss.
Interest-Rate Risk
Changes in interest rates can affect the value and attractiveness of certain income-producing investments.
Liquidity Risk
Some investments may be more difficult or costly to sell or access when funds are needed.
Fees & Expenses
Costs can affect the amount of income an investor ultimately receives. Looking at yield without considering expenses can provide an incomplete picture.
Complexity
Some higher-yield investments have structures or terms that can make them more difficult to evaluate. Understanding how an investment works matters before considering its potential return.
Yield Isn't the Same
as Total Return.
A higher stated yield can be attractive, but it doesn't tell the entire story about how an investment may perform.
Yield generally refers to the income an investment produces relative to its price or value. Total return can also reflect changes in the investment's value over time.
That distinction can matter in retirement. An investment may generate income while its market value declines. Conversely, an investment with a lower current yield may have other characteristics that are important to an investor's overall objectives.
Looking beyond the headline yield can help provide a more complete picture of an investment's potential benefits, risks, costs, and limitations.
How much income does the investment generate?
How might the investment's value change over time?
What risks are associated with generating that income?
What fees or expenses may reduce the investor's outcome?
Questions Worth Asking
Before Reaching for More Yield.
A higher yield may look attractive at first glance. A closer look can help reveal what is behind that yield and what tradeoffs may come with it.
Where does the yield come from?
Understand what generates the income and whether the stated yield reflects interest, distributions, dividends, or another source.
What risks am I taking?
Consider credit, market, interest-rate, liquidity, and other risks that may be associated with the investment.
Can I lose principal?
Understand whether the value of the investment can decline and under what circumstances losses could occur.
How easily can I access the money?
Consider whether there are holding periods, withdrawal restrictions, penalties, or other limitations on accessing your funds.
What does it cost?
Review fees, expenses, commissions, spreads, surrender charges, and other costs that may affect your overall outcome.
What role would this investment serve?
Consider whether the investment's characteristics align with the purpose of the money, your time horizon, income needs, and broader retirement objectives.
The Question Isn't Just
“How Much Does It Pay?”
For retirement investors, the purpose of the money can be just as important as the income it produces.
Money set aside for retirement may need to serve different purposes. Some assets may be intended to provide current income, while others may be reserved for future expenses, emergencies, or longer-term needs.
Because of that, evaluating an investment solely by its yield can miss other factors that may matter, including liquidity, potential loss of principal, volatility, fees, and how the investment fits with the rest of a retirement strategy.
Income Needs
How much income may be needed and when?
Time Horizon
How long might the money need to last?
Liquidity
How quickly may the money need to be accessed?
Overall Strategy
What role does the investment play alongside other resources?
Higher Yield Can Be
Part of the Conversation.
But it should be considered alongside risk, liquidity, costs, time horizon, and the role the investment is intended to play.
There is rarely a single number that tells the whole story of an investment. Understanding the relationship between potential income, risk, access to your money, and your broader retirement objectives can help you evaluate your options more thoughtfully.
The goal is not simply to pursue the highest yield available. It is to understand what you are receiving, what you are giving up, and whether the investment's characteristics make sense for its intended purpose.
Retirement Investing
Deserves a Bigger Picture.
Educational resources can help you understand the different considerations involved in retirement investing. If you have questions about your own situation, a conversation can be a useful place to start.
START WITH A CONVERSATIONA conversation does not create a client relationship or constitute investment, tax, or legal advice.
Important Information
The information presented in this article is for educational and informational purposes only and is not intended to provide individualized investment, tax, or legal advice. References to investments, strategies, risks, income, or potential returns are provided for general educational purposes and should not be interpreted as a recommendation or solicitation to buy or sell any security or financial product.
Investment decisions involve risk, including possible loss of principal. Higher potential income or yield may involve additional risks, costs, restrictions, or other considerations. Individual circumstances vary, and any investment decision should be evaluated in the context of a person's objectives, time horizon, liquidity needs, risk tolerance, and overall financial situation.
Rosenberg Wealth Management encourages individuals to seek appropriate professional guidance regarding their own circumstances.