If you’re concerned that investing in traditional stocks and bonds with a common asset allocation won’t provide a comfortable retirement for life, you’re not alone. We had those same concerns over a decade ago, along with millions of other investors over 50, and here’s what we discovered: Alternative retirement investment strategies can result in higher income than traditional buy and hold investing in stocks and bonds while also building wealth.
After almost 40 years of investing in stocks and bonds, both alone and with financial advisors, and implementing alternative retirement investment strategies over the past 15 years, I’ll share what we learned.
Long term buy and hold asset allocation and subsequent retirement withdrawals can work well for many younger and high net worth individuals. It’s less certain, however, for many investors over 50 than it is for those with decades to save and invest, or those without millions to retire.
In fact, the more the stock market has risen in the years leading to retirement, the less unreliable it becomes as a retirement investment solution.
What Are Alternative Investment Strategies?
Anything other than long term buy and hold investing based on asset allocation for your age and risk profile, along with retirement withdrawals of 3% to 4%, are usually considered alternative investment strategies.
This is because buying and holding a stock and bond portfolio is so widely promoted that it is accepted and used without question by investors, much like margarine being accepted as a healthy alternative to butter in the 1960’s.
The growing popularity and spread of more proactive investing and alternative income investments, along with historic low interest rates, is, however, chipping away at the assumption that traditional asset allocation and long term investing is the best way for everyone to invest for retirement, or in retirement.
The reality is that there are many alternative retirement investment strategies that have benefits that buy and hold investment strategies simply don’t provide.
The rest of this post will address potential alternative retirement investment strategies for those nearing retirement or in retirement.
As usual, all investment strategies you’ll read about here are what I call “slightly alternative investment strategies.” IOW, there’s nothing too outrageous here at Retire Certain, like tulips in Holland. Instead I write about what I call “slightly” alternative retirement investment strategies, or strategies with tweaks to long term traditional investing in stocks and bonds.
Keep reading if this slightly alternative investment approach appeals to you as we look at some alternatives to buy and hold investing.
Note: If you’re uncertain what I mean by long term traditional investing in stocks and bonds, read my post How to Understand Your Investments.
Value Investing Around Market Cycles
For the first slightly alternative retirement investment strategy, let’s consider value investing around market cycles because this core investment strategy can be applied to all types of investments to reduce risk while building wealth, too. It’s super important to consider a cycle valuation approach, IMHO, with every investment by asking the following question before investing in anything: “How is this asset valued relative to historical valuations?”
This is because investments become more and more expensive as economic expansions continue. Stocks, for example, typically hit their peak once the growth slows just after investors are convinced stocks will never decline.
Then stock (and many other) investments become less expensive after such a recession.
Asking this question before investing in anything can help avoid buying near tops and selling near bottoms, reportedly the most common mistakes individual investors make.
Read my related post What Goes Up When Stocks Go Down? Below is a video I did on this called How to Know If Stocks Will Go Up.
Investing Based on Valuations
Instead of a fixed asset allocation in stocks and bonds, by first comparing how an investment is valued relative to history you can:
- Adjust the percent you allocate to it
- Avoid the investment or asset class altogether until valuations are cheap again OR
- Invest more in that particular asset if it’s is undervalued relative to history
While I’m no economist, no one needs to be one to see that this is logical, yet it presents a challenge for most investors, usually due to FOMO (Fear of Missing Out).
The advantage that older investors have is that anyone over 50 who has been paying attention has seen these cycles several times, mostly from valuation changes in both their stock and real estate holdings over the years.
Read my related post How to Increase Net Worth Before Retirement.
Value Investing Vs Momentum Investing
Considering market cycles often leads to value investing which drives the percent invested in various assets, such as cash, stocks, bonds, and commodities. (Note that this same cycle approach can also be applied to small business and real estate investing as explained more ahead.)
On the other hand, allocations into asset classes can be made based on momentum investing instead of value investing. With momentum investing, asset classes are chosen because they are rising. While value investing seems opposite to momentum investing, consider that what is driving the momentum, at least initially, may be unusually low valuations.
In general, however, momentum investing tends to invest in high valued asset classes while value investing tends to invest in assets valued lower than normal. This is because momentum investing jumps on a trend and rides it until it slows; all the while valuations are rising.
(Both momentum investing and value investing integrate with factor based investing, which will be addressed later in this post.)
Isn’t This Riskier Than Long Term Passive Investing?
Value based investing naturally tends to invest around long term market cycles. While investing around market cycles often gets tagged as “market timing” or risky, the fact is that:
- Buying assets cheaper lowers risk since risk decreases with rising valuations that are connected to rising fundamentals
- Buying expensive assets increases risk since risk increases with rising valuations that are not connected to rising fundamentals
Opposite the risk that accompanies buying overvalued assets, however, is the risk that investors will miss out on stock market gains if they don’t invest in stocks at all. While this can happen from being overly risk averse, all investors have to decide the level of risk they want to accept from investing and invest around that acceptable risk level.
Value investing isn’t a new and risky alternative retirement investment strategy unsuitable for retirement. In fact, it’s the old fashioned way of investing if you think about it. Since the beginning of commerce, investors have purchased (or traded) assets based on them being or becoming worth more than the purchase price.
Value based investing around economic and related market cycles is the way successful investors invested long before the rise of asset allocation and index investing were sold to the masses.
Using Factors for Alternative Retirement Investment Strategies
The next slightly alternative retirement investment strategy is called factor based investing.
What Is Factor Based Investing?
Like a value investment strategy, factor based investing goes beyond a traditional retirement investment strategy using a basic stock and bond portfolio based on a static asset allocation model. It considers many different, ever changing factors in an effort to perform better than a typical basic stock and bond model with less risk.
Changing factors can be particularly important during retirement because the stability of employment income has ended; yet traditional investment strategies ignore changing factors for the most part.
It is my belief changing factors should always be considered when investing, especially during retirement. Factor based investing does just that, so let’s look at it more.
While valuations are considered in factor based investing, it isn’t just about buying undervalued investments like value investing, the first slightly alternative investment strategy addressed previously.
The factors may be based on macroeconomic factors, such as inflation or interest rates, or style factors, such as momentum, asset size or valuations.
How Is Factor Based Investing Different from Traditional Retirement Investment Strategies?
Traditional retirement investment strategies use a standard asset allocation model mostly made up of stocks and bonds. Historically, that model has been adjusted specifically for retirement, increasing the amount in bonds to generate more income, while lowering the amount in stocks to reduce risk.
Then the amount allocated into stocks and bonds stays the same.
On the other hand, factor based investing considers that interest rates are near all time lows, and considers this factor for investing decisions.
Factor based investing is less about someone reaching a stage in life and more about taking advantage of investment opportunities based on various factors.
Not only this, but traditional retirement investment strategies are more about making withdrawals from a retirement portfolio that grows slowly over time. Factor based investing is more about making money based on opportunities.
How Does Factor Based Investing Work for Retirement?
With factor based investing, someone who is planning to retire soon, or already retired, may use one of the following approaches rather than a fixed asset allocation based stock and bond portfolio blend.
Buy Assets with Low Valuations
Following the occasional bear market, the investor may make a large allocation into undervalued stocks resulting from that bear market.
Increasing Cash or Cash Equivalents
Seeing that assets are overvalued, an investor may raise cash or very short term bonds to have more funds available once other investment opportunities arise while lowering the risk of owning overvalued assets.
Reduction in Long Term Bonds
Based on historically low interest rates and the knowledge that bonds decrease as interest rates rise, the investor may reduce or even sell long term bond positions entirely.
Purchase of Alternative Assets
Noticing an undervalued rental property, and the higher income it provides vs bond income, an investor may purchase that property.
In each example, the investor is making investment decisions based on currently existing factors and the opportunities, disadvantages or risks associated with them. It’s easy to see how this differs from owning an asset based on an asset allocation model regardless of opportunities and risks.
You can see from the Vanguard chart below the logic behind the different factors used in factor based investing, which are based on economic and related market cycles. 
Tactical Asset Allocation
Tactical asset allocation (TAA) is closely relates to factor based investing. Like factor based investing, tactical asset allocation makes investments based on changing factors instead of using a typical asset allocation models incorporated into traditional retirement investment strategies.
Like factor based investing, the goal of tactical asset allocation is to obtain a higher return with less risk. Because many tactical asset allocation strategies use ETFs for asset class investments, reliable back testing can be done to see how various tactical asset allocation strategies would have worked over time.
As it turns out, many tactical asset allocation strategies are walking their talk; they outperform a typical stock and bond asset allocation based portfolio with less risk, and have independent third party research to prove it.
I invest using TAA strategies for our core portfolio. As of now, we cover all of our living expenses with alternative retirement investment strategies. We do, however, plan to make withdrawals from our TAA portfolios later in life. (For now, honestly, we’re having too much fun creating alternative income streams.)
What I like is that extensive retirement withdrawal sustainability research is available for various TAA strategies. Based on back testing data for several decades, the retirement withdrawal rate is significantly higher than the traditional 4% withdrawal rate. Drawdown periods are also shorter than a 60/40 stock and bond portfolio.
For this reason, I view this as a very viable alternative retirement investment strategy for us, and even teach clients how to evaluate, choose and implement their own strategies.
My favorite resource for researching and choosing TAA strategies is Allocate Smartly which you can read more about on my Resources page here.
Retirement Withdrawal Strategies
Traditional retirement investment strategies are based on making withdrawals from investment accounts to live. Alternative retirement strategies are typically based on generating income from assets instead of withdrawing from retirement savings. The rest of this post, therefore, will cover income generating assets.
MLPs for Retirement Income
MLPs are Master Limited Partnerships. These investments are often in some aspect of energy related businesses, such as transportation or drilling. Like almost all investments, MLPs valuations will vary based on the cycle of both the economy and the underlying natural resource, such as crude oil.
Creating a diversified portfolio of MLPs has historically been a slightly alternative retirement investment strategy given the high yield. It’s important to note, however, that the MLP industry has been under massive environmental and political change in recent years affecting prices and yields dramatically.
REITs for Retirement Income
REITs are Real Estate Investment Trusts. They allow the public to invest in large commercial real estate deals that would otherwise not be accessible to individual investors.
Like MLPs, REITs are structured different from stocks but can be bought and sold easily just like stocks though your online brokerage platform.
REITs typically have a higher yield than stocks.
Like MLPs, investing in REITs has some tax benefits. This benefit may possibly, however, be offset by the extra time it takes your CPA to prepare your return.
Like MLPs, a diversified portfolio of REITs has historically been an excellent slightly alternative retirement investment strategy given their higher than stock yield. And, of course, investors can also often build wealth from capital gains, too, when REITs increase in price.
Like the MLP sector, REITs have been under pressure given the surge in online retail and the shutdown affecting retail REITs. Not only this, but the work from home trend has negatively affected office space.
There are, however, many REITs that invest in apartments, as well as medical related properties that have held up well.
Covered Calls
Covered call investment strategies involve selling a call option against a stock you already own.
Contrary to popular belief, selling covered calls is not riskier than owning stocks without covered calls. In fact, selling covered calls is slightly less risky than owning stocks without covered calls since the call income reduces the overall cost of your stock position.
Covered call strategies can be added to other stock strategies seen in this post, such as factor based ETF investing or value investing, for example.
By doing this, you are using the same capital to generate extra income with the expectation of a capital gain, as well.
Covered calls can even be sold in retirement accounts.
The important downside of covered call writing is that basic covered calls work best in sideways and rising markets. For this reason, covered call strategies make sense as one among several diversified alternative investment strategies, particularly when income generation is the goal.
Applying the very first alternative retirement investment strategy of investing around market cycles reduces risk and increases returns from covered call writing.
Given that income from covered calls is often double or triple dividend income, covered calls can be an excellent retirement income strategy. This is especially true for investors who have large stock positions inside IRA accounts and need to make withdrawals anyway.
Read more about selling covered call in my posts How Do Covered Calls Work and Covered Calls for Income.
Real Estate Rentals
Real estate rentals are another one of my favorite alternative retirement investment strategies. Real estate rental properties provide income when structured correctly and bought at low valuations.
Real estate rental properties can be bought with leverage also, a particular bonus during periods of low interest rates.
While I don’t believe that any investment is completely passive due to the management and the brain power all investments require, the income from real estate rentals can be mostly passive income based on my personal experience.
Like all the alternative retirement income strategies here, considering market cycles before purchasing real estate can significantly enhance both income and wealth building opportunities.
Real estate rentals are another income generating asset that can lead to capital gains when bought during periods of low valuations or unusual circumstances. This can make them a solid alternative retirement investment strategy.
Small Business
There are several ways to invest in small business as addressed in this section.
The one thing that I learned early on about small business investing is to diversify well since small businesses have a very high failure rate. Well established businesses with increasing profits can help mitigate this risk, vs a newer small business that is not yet generating steady income. I have found the exception to this rule is owning our own online small businesses. Since we control these businesses and they require minimal investment capital to start, the risk is minimal.
Some form of small business investment can be an excellent way to add alternative retirement investments. Again, there are many options as covered below.
Online Lending for Startups
Online startup lending has become a popular investment in recent years; I have personally not invested in this space.
Given the diversification and pre-screening that many of the online startup investing platforms provide, however, I would consider this alternative investment if we were looking to expand our investment portfolio. You can read my entire post titled Investing in Startups for Individuals.
Angel Investing
Angel investing is yet another alternative retirement investment strategy in which many retires participate. Local angel investing can make sense for:
- Investors who live in an area with a strong angel network
- Investors who have business related experience
- Investors looking to be more hands on involved in small business but do not want outright ownership
- Investors who have the time and resources to diversify among several other small businesses.
Starting a Small Online Business
Starting a small online business is another favorite alternative retirement investment strategy. While owning a small business is not commonly considered an investment, I contend that it is an investment because your time and money go into it.
Not only this, but when structured properly, your online business can be sold, and it can also generate income while you own it. How could this not be called an investment?
Instead of investing in a public company over which you have zero control (unless you’re Warren Buffett), you can build your own online business for less than $25, control it, and reach a global market with it.
For more on what I believe to the one of the best, if not the best, alternative retirement investment strategies, read my related post Small Business Ideas for Later in Life and Is It Too Late to Start an Online Business?
Buying an Online Business
Investing an online businesses is becoming more common every day. Only recently buying an online business was considered the wild, wild west. Now, VC firms are buying online businesses and creating funds made up of them.
I haven’t bought an online business yet but I am actively seeking to buy one or more very small online businesses. I think we’ll all be kicking ourselves in a few years for not taking advantage of this alternative investment that can be bought at a very small fraction of public stock valuations.
The earnings multiplies at which small online businesses sell has increased from 2 to 4 over the past few years as they have become better accepted from the overwhelming success of many former blogs as well as e-commerce stores.
Applying the valuation cycle theory, after an economic slowdown, I expect small businesses will sell closer to multiples of 2 again.
Interestingly, this same principle can be applied to common stocks with the popular PE ratio which reflects the multiple of earnings reflected in a company’s stock price. The historical PE ratio of public stocks based on the S&P 500 is around 17; many stocks have PE’s of 100 and more. Compare this to buying a small online business you own entirely with a multiple of 3 or 4.
Again, small online businesses sell for a fraction of the earnings multiple of most common stocks.
Starting or Buying a Local Business
Given the huge amount of capital and time required to buy or start a brick and mortar business, after investigation, we decided not to do this when we first began alternative investing for retirement.
Now, however, I think this can be a good retirement investment strategy when the right tactic is used, and for the right person. As with all investments, the purchase price makes or breaks the viability of this strategy.
Lending for Real Estate
Lending for real estate with a first lien can be an excellent alternative retirement strategy. This can be done locally or virtually.
Online lending has also become a mainstream alternative retirement investment. I have not ventured into online real estate lending. This is mostly because we learned over a decade ago that we do best by touching and feeling our real estate investments near our own back door.
Online real estate lending, however, can make sense for many investors seeking alternative investments beyond traditional stocks and bonds. The geographic and property diversification that can be achieved from online real estate lending is appealing.
Like all investments in this article, valuations and risk are imperative to consider before investing.
Summary for Alternative Retirement Investment Strategies
As you can see, I am a big believer in alternative retirement investment strategies for those who don’t have enough money saved to live comfortably in retirement, or even those that do.
Alternative retirement strategies aren’t just for those lacking enough retirement funds; most wealthy investors use alternative investment strategies.
We are living in a time of incredible opportunity given the availability of reliable data to research alternative investments, the ease of purchase and the wide variety of alternative investments available for investors at all levels of net worth.
My Ultimate RISE Wealth Plan is packed with information on alternative retirement investment strategies. You can get it here now.
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