I Plan to Invest in Real Estate in Retirement -- but Not the Way You Think

Key Points

• Social Security won't be enough to cover my estimated retirement expenses.

• I plan to rely on my investment portfolio pretty heavily.

• I like the idea of investing in real estate as a retiree, but I have no intention of becoming anyone's landlord.

• The $23,760 Social Security bonus most retirees completely overlook ›

There are plenty of people who end up retiring on Social Security alone. Often, that results in a penny-pinching lifestyle that can be difficult after a lifetime of hard work.

If you earn an average paycheck, you can expect Social Security to replace about 40% of your pre-retirement income. But it's common for retirees to need a lot more replacement income than that.

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I certainly do not want to take a 60% pay cut in retirement, so I'm hoping to build up an investment portfolio that allows me to be less reliant on those monthly benefits. And I expect real estate to be a part of that portfolio.

But I don't intend to invest in real estate in the traditional sense. There's one specific type of investment I'm targeting that could be a great income source without the work -- and risk -- of owning physical property.

Why I'm banking on REITs

Some retirees choose to own rental properties that they manage and use as an income stream. But that doesn't sound appealing to me on any level.

First of all, I don't think I'd enjoy the work of being a landlord. I'm not at all handy, so fixing things in a rental when they break isn't something I have the stomach for. And frankly, I'm not always such a people person, and I'm not sure how much patience I'd have to deal with a demanding tenant.

I also know that owning physical real estate can open the door to huge expenses that could strain a retirement nest egg -- think repairs, rising maintenance costs, and climbing property taxes. I'm not interested in taking on those financial risks.

That's why my approach to investing in real estate when I'm retired centers on owning REITs, or real estate investment trusts, rather than owning a rental property. REITs are companies that manage portfolios of properties that generate income.

There are a few things I like about REITs. First, they're a great way to diversify a portfolio. Second, they offer the opportunity to invest in real estate without owning another home.

Third, REITs are required to pay at least 90% of their taxable income to shareholders as dividends. Investing in dividend stocks is a common strategy for retirees, since they can produce steady income. REITs can not only do the same but also potentially offer even higher-than-average dividends due to their structure.

Are REITs right for you?

Just as it's important to diversify your investments while you're building retirement savings, so too is it important to hold a mix of investments once you reach the point when you're using your portfolio for income. If you like the idea of investing in real estate but don't wish to own extra property or be a landlord, then REITs are worth looking into.

And even if you decide to own a rental property in retirement (maybe you like a good project), there's no reason to write off REITs. You may find that they complement your other investments nicely, allowing you to enjoy regular income that nicely supplements your Social Security checks.

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