Don’t Put All Your Retirement Income Eggs in One Basket

[J.J. Montanaro USAA]

Any discussion on the fundamentals of building an investment portfolio is likely to include the concept of “diversification.” The ideas of not putting all your eggs in one basket, having some investments zig while others zag, and participating across a variety of market segments are core to portfolio construction. 

Of course, investing is a means to many ends. For just about everyone, one of those goals is to build a nest egg that will allow you to live the life you want to live in “retirement.” The definition of retirement has evolved over the years. More options, more activities, and sometimes – in a counterintuitive way – different or more meaningful work have all been part of the shift. However, despite all the change, one thing remains constant: the need to create retirement income. Your retirement vision may impact the amount and importance of building income streams in retirement, but, likely, not the need. 

This brings us full circle. While diversification is an oft-discussed element of investing, it’s less associated with building retirement income plans. That shouldn’t be the case. Diversification can be a cornerstone, whether you’re accumulating or utilizing your portfolio. 

Here are five ideas to consider as you build your own diversified retirement income plan: 

1. More income streams, more flexibility. In a perfect scenario, a single guaranteed, inflation-adjusted stream of income would more than eclipse your needs. For most, a more realistic scenario includes several sources of income that can be adjusted based on market and economic conditions, as well as changes to your personal situation. Naturally, you have greater control and options if you have more sources to leverage. 
   
   
2. Taxes matter. Building a plan that includes sources of both taxable and tax-free income streams is a game changer. The tax code and tax brackets become your own personal playground as you make decisions to increase, decrease or eliminate various types of income to manage how much you pay in taxes. This flexibility is most easily created early in your accumulation journey with a tax-diversified approach to retirement investing. Roth conversions, permanent life insurance, municipal bonds, and careful use of retirement plan and IRA distributions could all be part of the mix.  
    
3. Guaranteed is good.  Safe, stable, and reliable income is a beautiful thing. That’s especially the case during turbulent times. We don’t have to push our memories too hard to recall wild market swings, scary headlines, and a lot of uncertainty. Times like those highlight the benefits of income streams from employer pensions, military retirement, certificates of deposit and immediate annuities. But guaranteed often comes at a cost…
   
   
4. A dollar today is not a dollar tomorrow. Unfortunately, many guaranteed streams of income don’t account for inflation. Military retirement is a notable, and extremely valuable, exception, but the majority of corporate pensions, government pensions and retail-purchased immediate annuity options don’t include an inflation adjustment. If they do, it’s an expensive add-on. Income sources from dividend-paying stocks, convertible securities and real estate investments may all help on that front. Diving into the details is outside the scope of this article, but inflation clearly provides a solid inspiration for diversifying your retirement income streams. 
   
5. Smart Social Security choices. According to Social Security, about 90% of Americans over 65 receive income from this program. That makes it very likely that it will be part of your diversified retirement income plan. However, it’s important to make smart choices on timing, to leverage retirement credits and to understand survivor benefits in order to make the most of your own Social Security benefit.  

Creating and utilizing multiple retirement income streams will put you in better position to, yes, live your retirement dreams. 

Related post:

5 Money Mistakes to Avoid

About the Author: JJ Montanaro is a Certified Financial Planner® professional and part of the Military Affairs team at USAA. He’s a graduate of the U.S. Military Academy and has over 20 years of financial planning experience.

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