Just as diversifying your investments is important during your working years, so too should you aim to diversify your holdings once you enter retirement. To that end, you may be thinking of maintaining a mix of stocks and bonds in your portfolio as a senior. But what about REITs? Do they make sense for retirees?
The quick answer? Absolutely.
What are REITs?
Short for real estate investment trusts, REITs are companies that own or operate real estate that generates income. Generally, REITs specialize in a specific area of the market. For example, there are mall REITs that operate shopping centers, hotel REITs, and data center REITs, to name just a few types. Many REITs trade publicly, like stocks.
What makes REITs good for retirees?
Retirees generally seek out relatively safe, stable investments, and to that end, REITs fit the bill. That's because REITS offer:
- Diversification without undue risk. Buying actual real estate carries risk. If you buy an income property, you'll need to maintain it, pay property taxes on it, and fill it with tenants. On the other hand, if you buy REITs, you'll add real estate to your portfolio without actually having to own, operate, or manage a physical property. Furthermore, stock market activity does not tend to influence REIT values, so buying REITs could give you added protection in the event of a stock market crash during your golden years.
- Reliable income. Retirees are often encouraged to hold investments that generate income. Dividend stocks, for example, pay quarterly dividends while bonds pay interest twice a year. Similarly, REITs pay regular dividend income, which makes them an optimal retirement investment, giving seniors extra cash to either spend or reinvest. In fact, REITs are actually required to pay at least 90% of their taxable income to investors, which is why they typically offer a higher dividend than stocks. And for the record, stocks aren't required to pay dividends -- even companies that pay dividends for years can halt that practice.
Do REITs carry risk for seniors?
REITs aren't risk-free. When real estate values fall, it can impact the value of REITs, and market conditions can also affect their performance. Case in point: Right now, a lot of retailers are filing for bankruptcy in the wake of the coronavirus pandemic. As a result, shopping mall REITs risk taking a major hit if their tenants bail out or close down permanently. Or, to put it another way, if a mall REIT loses tenants and fails to generate enough revenue, its investors can get hurt.
That said, there's really no such thing as a risk-free investment. Stock values can fall, and bonds can default on their interest obligations. Doing thorough research can help you land on the right REITs for your retirement portfolio, thereby mitigating some of that risk.
Are REITs a good choice for you?
Investing in real estate is a good way to secure additional income during retirement. But in the battle of REITs versus physical properties, REITs win for being the less risky -- and also less complicated -- option of the two. It pays to consider adding REITs to your retirement portfolio, especially if you like the idea of having an extra income stream to look forward to once the paycheck you've relied on for years disappears.