One key aspect of retirement planning is creating a diversified income strategy that can support you throughout your retirement years. Relying on a single source of income leaves you exposed if that source changes; drawing on several streams at once makes your monthly budget far more resilient.
Most retirees combine some of the following sources. Understanding how each behaves, and how they fit together, is the foundation of a secure financial future.
1. Social Security
For many seniors Social Security is the bedrock of retirement income. It is adjusted for inflation each year and lasts for life, which makes it uniquely valuable. The age at which you claim has a lasting effect on the monthly amount: claiming at 62 reduces payments, while waiting past your full retirement age can increase them by up to 8% for each year you delay. Our guide to maximizing Social Security benefits covers the main strategies in detail.
2. Pensions and annuities
A traditional pension, if you have one, provides a predictable payment each month. Annuities purchased from an insurance company can play a similar role, converting a lump sum of savings into guaranteed income for a set period or for life. Because guaranteed income covers essentials such as housing, food and healthcare, it reduces the pressure on the rest of your savings.
3. Retirement savings and investments
Withdrawals from 401(k)s, IRAs and other savings accounts usually fill the gap between guaranteed income and your actual expenses. Spreading these savings across different types of investments, such as bonds, dividend-paying stocks, index funds and cash reserves, helps smooth out the ups and downs of any single market. Many retirees keep one to two years of expenses in cash or short-term bonds so that they are never forced to sell investments during a downturn.
4. Part-time work and other income
Part-time or consulting work, rental income from property, or income from a small business can supplement the sources above and, just as importantly, delay the point at which you need to draw down savings. Be aware that earnings before your full retirement age can temporarily reduce Social Security payments.
Putting a diversified plan together
- Estimate your essential expenses. Housing, utilities, food, insurance premiums and healthcare come first.
- Cover essentials with guaranteed income. Aim for Social Security, pensions and any annuity income to meet those core costs.
- Use savings for everything else. Travel, hobbies and gifts can come from investment withdrawals, which can flex from year to year.
- Keep a cash reserve. A buffer for surprise expenses protects your long-term investments.
- Review the plan every year. Inflation, health and family circumstances change; your income mix should change with them.
Diversifying your retirement income is less about chasing the highest return and more about making sure that no single event can upset your finances. A financial advisor who specializes in retirement planning can help you weigh the options and tailor the mix to your circumstances. You can also read our guide to estate planning to make sure the wealth you have built is protected for the people you care about.
