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As you approach the time when you’ll trade your paycheck for retirement, you’ll begin relying on your hard-earned retirement income sources to help provide an income stream that will see you through your retirement years.
Determine your retirement income sources
Start by determining your potential sources of retirement income, and how much income they are likely to provide in retirement. Common income sources include:
- Guaranteed Income (i.e. Social Security, Annuities)
- Pension plans (i.e., defined benefit plans)
- IRAs
- Qualified employer sponsored retirement plans (QRP) such as, including 401(k), 403(b), and governmental 457(b)
- Other nonretirement savings, including brokerage accounts, savings accounts and certificates of deposit (CDs)
Categorize your retirement income sources
As you think about the retirement income sources available to you, begin grouping them into income categories such as lifetime, dividend, and interest income. Because of their predictability, many retirees use lifetime income sources to cover essential living expenses. Discretionary and unexpected expenses are generally more flexible than essential expenses, so your investable assets can help cover these costs.
|
Dividend |
Interest |
Lifetime |
|
|---|---|---|---|
| Goal
|
Income with growth potential
|
Steady income stream
|
Lifetime income stream
|
| Examples
|
Dividend-producing stocks, equity mutual funds
|
Bonds, bond mutual funds, fixed income instruments, cash, CDs
|
Social Security benefits, pension plan payments, annuity payments, insurance benefits
|
| Helps manage
|
Adverse impact of inflation
|
Market volatility
|
How long income stream will last
|
| Benefit
|
Seeks to provide growth to help outpace inflation
|
Helps reduce impact of market volatility
|
Helps create an income stream to cover essential expenses
|
| Considerations
|
Severe market drops or prolonged periods of volatility can reduce portfolio value
|
May not produce income adequate to outpace inflation and rising health care costs
|
Limited liquidity and control of assets Additional costs associated with annuity and insurance products
|
Diversify your retirement income sources
Because each retirement income category represents a different type of income, and mitigates different retirement risks, diversifying your retirement income across all three can help you generate income in retirement that may last a lifetime.
- Dividend: Equity income investments. Designed to provide long-term growth and income, equity income investments can help offset the effects of inflation. As you approach retirement, keeping a portion of your investable assets invested in high-quality, dividend-producing stocks and equity mutual funds can help hedge your retirement portfolio from inflation risk. These investments also give your portfolio the opportunity to benefit from strong market performance — which is increasingly important for retirees, as many people are spending 20 or more years in retirement. However, equity investments are, of course, subject to market volatility.
- Interest: Bond and fixed income investments. Interest-bearing investments offer the potential for a stable, low-risk income stream, while also preserving your principal investment. As you near retirement, increasing your interest-bearing investments may help your portfolio weather market fluctuations; however, these investments are subject to credit and other risks.
- Lifetime: Social Security and pensions. Social Security benefits are the primary source of lifetime income for many of today’s retirees. Although you can start receiving Social Security benefits as early as age 62, or defer your benefits until age 70, the monthly payment amount you receive varies based on your retirement age. The Social Security Administration’s Social Security tool can help you decide when to start receiving Social Security benefits.
Get started today
- Learn more about investing options available to you.
- Request a free retirement consultation to see if your retirement planning is on track.
- Consider working with a Financial Advisor to create an investment strategy for your retirement portfolio.
