The REIT Income for Retirement: 6 Reasons to Invest in REITs (2024)

REIT Income Opportunity for Aging Retirees

Advancements in healthcare are allowing retirees to be more active and live well into their late 80s or longer. That means retirement income is becoming increasingly important for aging retirees. While traditional income vehicles like CDs (aka Certificate of Deposit or conservative savings account with a high-interest rate and penalty for withdrawal) and bonds can help, financial advisors are looking for other sources of income to help bridge retirement income gaps.

One alternative that has been gaining the attention of advisors and investors alike is a real estate investment trust or REIT. According to Nareit, the National REIT Trade Group, the average daily dollar trading volume for REITs continues to increase over time:

  • October 2013: $5.2 billion
  • October 2018: $7.5 billion
  • October 2023: $8.0 billion

It’s important to note that despite being a well-regarded option for investing in a down market, there are still risks associated with REITs. Examples are:

  • Adverse effects of low real estate prices
  • Lack of liquidity (Cannot always be sold on the public market, though some public REITs are available)
  • If not publicly traded, difficulty determining the value of a single share of the overall investment and/or value of the overall investment

Other factors to consider are that dividends may be paid from offering proceeds and borrowings, which can reduce share value and limit the company’s future asset purchases. That use of external managers poses a risk for conflict of interest.

Still, many find that REIT income offers 6 distinctive advantages to those looking for a retirement income strategy that is likely to weather the ups and downs of both the stock market and changing life circ*mstances.

The 411 on REITs

Created by Congress in 1960, REITs give investors the opportunity to invest in income-producing real estate through pooled portfolios of securities modeled after mutual funds. In other words, you are investing in a professionally managed group of properties.

REITs can include actual land, as well as apartments, offices, or hotels that generate income through the collection of rent. They may also include mortgages or mortgage securities tied to the properties. REITs provide investors with access to diverse portfolios of income-producing assets they would not be able to afford on their own.

Listed REITs are prominent in today’s investment landscape. They are included in 225,000 401(k) plans, and more than 150 million individuals are invested in REITs through these and other investment plans. There are more than 200 mutual funds and ETFs dedicated to stock exchange-listed REITs sponsored by major investment management firms.

Additionally, REITs are in a majority of target-date funds, most pension funds, and endowment portfolios and are one of the fastest-growing retail investment default options. As of November 2022, a little less than half of Americans (a whopping 45%) are invested in REIT stocks.

6 REIT Advantages for Generating Retirement Income

For investors looking for a retirement income-producing asset as familiar as an investment “next door,” there are six good reasons to diversify your portfolio with REITs:

1. REITs Help Offset the Impact of Inflation

Even at low levels, the cumulative effects of inflation over long periods can erode the purchasing power of portfolio assets. The dilemma for retirees is that it can be hard to stay ahead of inflation with fixed income securities, while equities are trimmed back to reduce investment risk. According to Patrick W. McKeon JD, CFP®:

Across all generations, individuals tend to create their retirement nest egg during their prime earning years based on long-term growth and accumulation strategies. Then, they gradually switch toward more conservative, income-oriented approaches as retirement day draws closer.

NAREIT claims that REITs offer a form of inflation resistance because commercial real estate rents and values tend to increase when prices do. As a result, this supports equity REIT dividend growth, which can provide retirement investors with reliable income, even during inflationary periods.

A look at the long-term track record for REITs (as measured by the FTSE NAREIT All Equity REITs Index) shows how well this class of investments performed as a hedge against inflation. REITs have proven to be more inflation-resistant than the S&P 500 Index and Barclays Capital U.S. Aggregate Index for the six-month rolling periods from December 31, 1975 through December 31, 2018.

2. REITs are a Potent Source for Retirement Income

According to Nareit, July 2019 yields for equity REITs outperformed the S&P 500 index yield, 4.16% to 1.97%, respectively. 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. On average, 70% of the annual dividends paid by REITs qualify as ordinary taxable income, 15% qualify as return of capital, and 16% qualify as long-term capital gains.

Most income distributed from REITs is taxed as ordinary income rather than as dividend income. Like mutual funds, REITs can deduct from their corporate tax liability the amount they pay out as dividends. Shareholders pay tax on the dividend income they receive, generally at ordinary income tax rates.

3. REITs Demonstrate an Attractive Record of Outperformance

For a 65-year-old married couple, the probability that at least one will reach 92 is 50%, per the Society of Actuaries (SOA). That means that in addition to income, an investment will need to deliver an attractive level of risk-adjusted return. According to recent performance numbers from JP Morgan, REITs outperformed gold, oil, the S&P 500, bonds, the EAFE index, and inflation for the 20 years ending December 31, 2018, on an annualized basis.

4. REITs Offer a Proven Way to Diversify a Portfolio

Portfolio diversification is arguably one of the most important ways investors can temper risk. In fact, REIT investors share an advantage with other real estate investors: the ability to hedge against national and even international market risks.

The long-term correlations of equity REITs with other asset classes range from a low of -0.28 to a high of 0.76. Negatively correlated to currency prices, REITs have only a 30% correlation to bond prices and a 71% correlation to domestic large-cap equities.

5. REITs Come With Tax Benefits

REITs can provide tax-deferred income due to the depreciation of a property or a portfolio of properties. The greater the amount of depreciation expense, the more likely it is that the taxable part of distributions made by the REIT will decrease.

To capitalize on this potential tax benefit, it is important to understand the two classifications of distributions:

  • Ordinary Income is the portion of the shareholders’ distributions that are taxable on a DIV Form
    • Represents the operating profits from the REIT’s investment in real estate
  • Return of Capital is the portion of distributions that are not treated as taxable income to shareholders on a 1099-DIV Form
    • Occurs when the REIT’s current distributions exceed its earnings
6. A Smart Tax-Deferred Choice for Self-Directed IRAs

With so many pre-retirees searching for new ways to diversify their income beyond traditional investments, a REIT may be the right complement to a portfolio.

According to Paul D. McConville, President of Quincy Capital Partners, LLC:

Self-directed IRAs in invested alternatives like REITs may also allow investors to diversify a portfolio beyond traditional equity, bond, and mutual fund choices.

In effect, with a self-directed IRA, investors and advisors may gain a wider scope of action for how, when, and where to invest retirement assets. When combined with a self-directed IRA, the tax advantages of a REIT can be dramatic. Through a self-directed IRA, a REIT can grow dividends and capital gains on a tax-deferred basis. Taxes are paid on proceeds once they are distributed to an investor.

When It Comes to REIT Investing, Due Diligence is Required

While listed equity REITs are an investment in real estate, they also are stocks, which means their prices may rise or fall. Additionally, commercial real estate is a cyclical business with cycles that differ from those of other equities. Changes in the values of the property portfolios owned by listed equity REITs affect the valuation of their shares. Like every other investment strategy, there is no substitute for closely examining a REIT’s underlying prospectus.

We think you’ll also like:

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

  1. Crowdfunding from the Investor’s Perspective
  2. Making Cash with Cannabis
  3. The Start-Up/Small Business Advisor

This is an updated version of an article originally published on August 21, 2019 and updated on November 28, 2023.]

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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The REIT Income for Retirement: 6 Reasons to Invest in REITs (2024)


The REIT Income for Retirement: 6 Reasons to Invest in REITs? ›

Using a REIT for retirement income can offer several benefits such as consistent dividend income, potential for capital appreciation, diversification benefits, and liquidity and accessibility compared to direct real estate investment.

Are REITs good for retirement income? ›

Using a REIT for retirement income can offer several benefits such as consistent dividend income, potential for capital appreciation, diversification benefits, and liquidity and accessibility compared to direct real estate investment.

Why should I invest in REITs? ›

REITs offer a number of attractive attributes such as growth, income, and diversification. REITs have historically delivered strong results and provide attractive income relative to other asset classes. They offer diversification relative to traditional investments like stocks and bonds.

What is one advantage of investing in REITs quizlet? ›

Why invest in REITS? They provide greater diversification, potentially higher total returns and/or lower overall risk.

What is the 90% rule for REITs? ›

How to Qualify as a REIT? 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.

Why are REITs good for retirement? ›

There are several benefits of adding a REIT to your retirement portfolio. They can provide income, capital appreciation, diversification, inflation protection and could be considered passive investments – meaning you don't need to manage tenants or collect rent from realizing returns on your investment.

Should retirees invest in REITs? ›

Retirees should be looking for solid investments that generate a stable yield or income for them during their retirement years,” Ser says. “Both REITS and certain ETFs can accomplish that.”

What are the pros and cons to REITs? ›

Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.

Are REIT funds a good investment now? ›

With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year. Ultimately, the decision on whether or not to buy REITs will depend on the specific circ*mstances and risk tolerance of each investor.

What I wish I knew before buying REITs? ›

Lesson #1: The Dividend Should Be An Afterthought

It may sound counter-intuitive, but lower-yielding REITs have actually been far more rewarding than higher-yielding REITs in most cases. That's because REITs are total return investments, and growth and appreciation are even more important than the dividend yield.

Why do investors like REITs? ›

Perhaps the biggest advantage of REITs is that individual investors can access profits from real estate without the need to own, operate, or directly finance properties. They offer a low-cost way to invest in the real estate market.

What is a disadvantage of REITs? ›

Lack of liquidity

Non-traded REITs are also illiquid, which means there may not be buyers or sellers in the market available when an investor wants to transact. In many cases, non-traded REITs can't be sold for a minimum of 10 years.

Why would an investor want to invest in a REIT quizlet? ›

REITs can provide diversification benefits to an investor's portfolio. Broker-dealers created funds of hedge funds so smaller investors could participate in these types of investments. These funds must be registered under the Investment Company Act of 1940 and usually have a minimum investment amount of $25,000.

How much of my retirement should be in REITs? ›

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

What is bad income for REITs? ›

For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.

Can REIT beat inflation? ›

And REITs have historically offered strong performance. Over the last decade, the MSCI U.S. REIT Index has an average annual return of more than 10%. That's a great way to beat inflation.

Are REITs better for retirement accounts? ›

REITs are excellent candidates for retirement account investments. The tax-advantaged nature of retirement accounts can magnify the already tax-advantaged nature of REITs, which can result in some powerful long-term return potential.

What is the downside of REITs? ›

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Is REITs good for passive income? ›

Real estate investment trusts (REITs) can be an excellent way for investors to make a passive income. The regular rents these companies receive gives them the financial firepower to pay a steady dividend. They are also subject to unique rules that require them to pay most of their profits out to shareholders.


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