How to Use Gold for Retirement Income

Investing in assets can put you in a better position by the time you’re ready to retire. While stocks and real estate have received plenty of attention over the years, gold remains a reliable investment that has been around for thousands of years. It’s an essential resource for many industries, is a medium of exchange and serves as a safe-haven asset during geopolitical unrest or periods of market volatility.

Gold is a hedge against inflation and can thrive during economic uncertainty. That last advantage is a key distinction that separates it from stocks and real estate. However, physical gold doesn’t produce yield like dividend stocks or cash flow like investment properties.

Fortunately, it’s still possible to use precious metals to generate retirement income. This guide will explain several ways to use gold for retirement income.

Open a gold IRA

A gold individual retirement account — or gold IRA — allows you to accumulate physical precious metals in a tax-advantaged account. You won’t have to worry about gold storage, as the IRA’s custodian will handle it. You can then cash out on your gold holdings when you need to cover living expenses.

The IRS sets limits for how much you can contribute to an IRA, whether it’s a conventional or gold IRA. If you make the maximum contribution to a gold IRA, you can’t contribute to another IRA. The maximum contribution for traditional and Roth IRAs is currently capped at $7,000 per year for those age 49 and younger.

The IRS raises this limit periodically, but you can make catch-up contributions if you are 50 years or older. Catch-up contributions allow you to invest an additional $1,000 into your IRA each year.

Anyone can open a Roth IRA, but your modified adjusted gross income must be below $146,000 to contribute the full amount. Investors who earn too much for a Roth IRA can use the backdoor method to fund it. This involves moving funds from a traditional IRA — which doesn’t have income restrictions — to a Roth IRA. Some gold IRA providers give you the flexibility to set up traditional and Roth IRAs.

Learn more by reading our guide to the best gold IRA companies.

Invest in gold stocks and gold ETFs

Gold stocks are easier to buy and manage than physical gold. You also wouldn’t need a separate IRA just for gold investments. However, gold stocks can underperform the precious metal due to several factors.

For instance, Newmont Corp. — the world’s largest gold mining company — has only seen its stock gain 13% over the past five years, failing to keep pace with gold prices, which have gained more than 70% during the same period.

Varying financial performances and opportunities result in gold stocks having different results than physical gold. Investors have to trust that a company will make good business decisions instead of leaning exclusively on the long-term reliability of gold.

However, gold stocks have an edge with liquidity, especially if you want to receive dividends. For example, Newmont has a dividend yield above 2%, and it’s not the only gold stock that offers a good dividend. Some people prefer to avoid the complexities of converting physical gold into cash and opt for dividends and stocks instead.

Some gold exchange-traded funds also produce yield, which help generate income in retirement. These gold ETFs hold baskets of gold mining companies, whereas some gold ETFs are backed by physical gold and do not pay dividends. Similar to gold stocks, gold ETFs have also lagged the gains of physical gold. For example, while the VanEck Gold Miners ETF has a dividend that yields around 1.34%, it gained 41.55% over the past five years compared to the 70% return for physical gold.

Buy physical gold and exchange it when necessary

It takes more time to buy physical gold than buying a stock, including finding a reputable and trustworthy gold dealer. Physical gold isn’t as liquid, and you are responsible for storage (and optional gold insurance, as well). However, a key advantage of physical gold is that you claim full ownership of the asset.

While gold ETFs and IRAs give you exposure to gold and better liquidity, buying the physical asset gives you the most control. Some people value having control over the asset instead of trusting a custodian, gold miner or fund manager.

Luckily, physical gold commands a lot of value without taking up much space. A kilogram of gold is smaller than most iPhones, and an ounce of gold is about half the size of an iPhone. It’s easy to hide and move gold around if needed, but it’s still good to find professional storage and get it insured in case something happens.

Physical gold should continue to gain value due to inflation. Then, you can sell your gold bars and coins when you need extra retirement funds.

Should gold be a part of your retirement strategy?

Putting all of your eggs in one basket is very risky, and that’s why many experts recommend diversifying your portfolio. Gold can be a valuable part of the mix, as its returns aren’t correlated to the stock market. The prices of precious metals can hold steady or gain value when stocks and real estate enter corrections.

And while expert opinions on gold vary, many agree that investors shouldn’t allocate more than 5-10% of their portfolio to the precious metal. This amount of exposure provides a good buffer against inflation while allowing you to allocate funds to other asset classes.

IRAs are attractive options for gold investors who want to capitalize on tax benefits while growing their portfolios. Conventional IRAs reduce your present taxable income, while Roth IRAs shield you from taxes on your distributions and capital gains. While those types of accounts can hold gold-backed equities like stocks and ETFs, only gold IRAs can hold precious metals.

Investors should assess their long-term goals and financial situations before accumulating gold.

More from Money:

Best Gold IRA Companies

Best Online Gold Dealers

Beginner’s Guide to Investing in Precious Metals