REITs and Retirement

01/28/2013 | by

The immediacy of the need to find solutions that will help ensure the retirement security of Americans is heightened by the growing wave of baby boom generation Americans who now are entering their retirement years. By the time the last members of this huge demographic cohort turn 65 in 2030, more than one-fourth of the U.S. population will have entered its retirement years and the economics of the Social Security program will be fundamentally changed.

Today, there are 2.9 workers supporting each Social Security retiree – down from 3.4 in 2000. In 2030, the number will be reduced to 2.0. Additionally, the Social Security Administration’s current projections indicate the Social Security Trust Fund’s reserves will be exhausted in 2033.

As a generation of Americans seeks ways to fund its own retirement through savings and investment, REITs are well positioned to play an important role, both as an investment to help build a retirement portfolio and to provide income to meet living expenses in retirement.

REITs’ requirement to pay out their taxable income to their shareholders in dividends makes REIT stocks strong generators of income in both good and bad market environments. Over longer holding periods, nearly three-fifths of REIT total returns have come from dividends.

REITs help build a retirement portfolio and provide income to retirees.

A $10,000 investment in the FTSE NAREIT All Equity REITs Index at the beginning of January 1992 would have grown to $47,911 21 years later at the end of 2012, just based on share price appreciation and dividend payments alone. With all dividends reinvested, the value of the investment at the end of 2012 would have grown to $95,027 – representing a total return of 11.3 percent per year on average.

In addition to providing income, REITs’ low-to-moderate correlation with stocks and bonds over the long term provides valuable diversification to retirement portfolios, helping to reduce overall portfolio volatility and cushion nest eggs from market shocks both prior to and in retirement years. TWilshire Associates recent research on optimizing asset allocations in target date funds for investors at different points in their lives showed that optimal U.S. REIT allocations in a portfolio began at 16.1 percent for an investor with a 40-year investment horizon. This allocation gradually declined along with other equities as the investment horizon shortened, although it remained at 7.1 percent for an investor at retirement. The listed REIT allocation declined further along with other equities throughout retirement, but remained at 1.6 percent for an investor 15 years into retirement.

Additionally, REITs have proved to be an effective hedge that can help shield portfolios against inflation, which can outstrip the investment income necessary to fund retirement years.

In the national discussion about retirement planning and security, REITs have a strong story to tell. NAREIT will be working to make that story clear in the weeks and months ahead.