Why My Retirement Portfolio Is Loaded With REITs

You know what would be really nice? If Social Security were to somehow pay me enough money that I wouldn't have to worry about saving and investing for retirement.

But alas, that's just a pipe dream. I know fully well that Social Security will only replace about 40% of an average earner's pre-retirement income. I'm not eager to take a 60% pay cut in retirement, so it's on me to save and invest to supplement those monthly benefits.

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To that end, I work hard to max out my 401(k) plan each year and sock money away in other long-term accounts consistently. I also make a point to choose my investments carefully.

One investment you'll see a fair amount of in my portfolio is real estate investment trusts, or REITs. If you're not familiar with REITs, they're companies that operate portfolios of properties.

It's possible to buy into private REITs, but my preference is to buy REITs that are publicly traded like stocks. That way, it's easy to track their performance and buy and sell shares.

There are a few reasons I'm a big fan of investing retirement savings in REITs. Here's what they are -- and how they might benefit you.

1. Generous dividends

Investing in dividend stocks is a common strategy for pre-retirees and retirees alike. The logic is that while you're building wealth for retirement, those dividend payments can help grow your portfolio if you make a point to reinvest them. And then, once you're actually retired, you can use those dividends for income.

REITs offer the same benefit, but more. REITs are actually required to pay a minimum of 90% of their taxable income to shareholders as dividends. Because of this, they tend to offer higher-than-average dividends. I like having that income hit my portfolio so I can reinvest it.

2. Appreciation with less stress

A big part of my retirement investment strategy is putting money into growth stocks. But man, sometimes those growth stocks keep me up at night.

Growth stocks, by nature, can be very volatile. It's fun when they deliver huge gains and a lot less fun when they tank and result in gigantic losses.

The nice thing about REITs is that like any stock, they can gain value over time. But generally speaking, they tend to be less volatile than growth stocks. If you're a naturally anxious investor, they may end up being a good balance.

3. Diversification

As I just mentioned, it would be imprudent to keep the majority of my retirement portfolio in growth stocks, despite the potential upside. REITs allow me to diversify, only without requiring me to own physical real estate.

I have friends who own income properties. Some do quite well with those properties financially, but it comes at the cost of tons of work and lots of stress.

I have no interest in being a landlord. I barely have time to maintain my own home these days, let alone a rental property. So that's one area of real estate investing I do not intend to dabble in anytime soon.

REITs allow me to invest in real estate in a different way. And if the idea of owning an income property doesn't appeal to you, then you may also find that REITs are a good replacement.

An investment worth considering

I want to be clear that like any investment, there can be drawbacks to investing in REITs. REITs, by nature, may not experience the same level of share price appreciation as other stocks. And those dividend payments, nice as they may be, could create a big tax liability for you, depending on where you hold your REITs.

You should also know that private REITs are far less liquid than REITs that are publicly traded. REITs in the latter category can be bought and sold easily. Private REITs tend to come with lock-up periods and costly redemption policies. Take it from someone who's still trying to exit one.

If you're going to invest in REITs, I strongly recommend those that trade publicly. And I'd also urge you to read up on the pros and cons of REITs before adding them to your portfolio.

However, for me, they're a great retirement investment. And after doing your research, you may feel the same.

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