Are REITs good for retirees?
REITs can provide a steady stream of income through dividends, making them an attractive option for retirees. However, like any investment, they come with risks and it's crucial to balance these against potential benefits.
REITs are a Potent Source for Retirement Income
As of October 2023, this still holds true at 4.59% and 1.61%. Beyond yields, however, a major benefit of REITs is their requirement to distribute most of their taxable income — at least 90% — annually to their shareholders as dividends.
- Dividend Taxes. REIT dividends can be a great source of passive income, but the money you receive is subject to your ordinary income tax rate, which will depend on your tax bracket. ...
- Interest Rate Risk. ...
- Market Volatility. ...
- You Have Little Control. ...
- Some Charge High Fees.
Investing in REITs through a retirement account can have certain tax benefits. For example, if you hold REITs in a traditional IRA, you may be able to deduct your contributions from your taxable income, and your investments will grow tax-deferred until you withdraw them in retirement.
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
With respect to financial advisors, the just completed Chatham Partners survey found that 83% of financial advisors invest their clients in REITs and the most frequently referenced attribute they cite is “portfolio diversification.” As exhibited below, advisors recommend allocations to REITs in the range of 4% to 12% ...
Ideally, you'll choose a mix of stocks, bonds, and cash investments that will work together to generate a steady stream of retirement income and future growth—all while helping to preserve your money.
Summary of Why Investors May Not Want to Invest in REITs
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
REITs historically perform well during and after recessions | Pensions & Investments.
In general, REITs are underperforming the real estate sector, which isn't exactly having the best year of its life either. Some REITs could be performing better than the sector, but dig into the company before you invest in it.
Can REITs lose value?
Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
REITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
![Are REITs good for retirees? (2024)](https://i.ytimg.com/vi/6GC0RodDM1g/hq720.jpg?sqp=-oaymwEcCNAFEJQDSFXyq4qpAw4IARUAAIhCGAFwAcABBg==&rs=AOn4CLD9vcxMk9c1K0T5-GhWC_24GkS1WA)
If you invested in the REIT outside of your Roth IRA, the dividends would be taxed as income. In many ways, investing in REITs in your Roth IRA is the ideal way to invest in a REIT. Their dividends greatly compound over time and you won't have to pay taxes on them when you reach retirement age.
For most of 2023, persistent macroeconomic uncertainties and a high interest rate environment kept the performance of the real estate investment trust (REITs) industry under pressure. However, the Fed's latest decision to keep interest rates steady and an indication of three rate cuts in 2024 cheered REIT investors.
That's because when interest rates rise and yields balloon, their valuations tend to suffer, which is what happened after it became clear in 2021 that the U.S. Federal Reserve would embark on an aggressive, multiyear tightening campaign. Many REITs experienced declines of more than 50% after that point.
REITs Could Offer Investment Opportunities in 2024
Looking to 2024 and beyond, it's clear that potential total return outperformance, attractive pricing with converging valuations, and solid balance sheets likely will increase the appeal of REITs and offer investors tactical and strategic investment opportunities.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
The Rule of 95 is an alternative full benefit retirement eligibility date to allow members to retire earlier than their schedule-based eligibility date. Under the Rule of 95 members can retire when their age plus their years of service equal 95, provided that they are at least 62 years old.
Investors can benefit from allocating as little as 5% to REITs. Investor confidence in real estate reached unprecedented levels in 2022, owing to home price appreciation and higher yields for other asset classes, such as REITs, in low-rate environments.
If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
Should a 75 year old be in the stock market?
If you're 75, for example, then you should have 25% in stocks. But now that Americans are living longer, that formula has changed to 110 or 120 minus your age — meaning that if you're 75, you should have 35% to 45% of your portfolio in stocks.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
This is the biggest and most important mistake that REIT investors keep on making. They see REITs as "income vehicles" and therefore, they will select their investments based on their dividend yield. In their mind, the higher the better. But in reality, the dividend is just a capital allocation decision.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
In 2023, more institutional investors will likely consider REITs as part of portfolio completion strategies to gain geographic diversification or sector diversification, or to enhance their portfolios' ESG attributes. Our 2023 outlook wouldn't be complete without a deep dive into the institutional investor space.
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