Should You Diversify Your Retirement Income?

Eggs in a nest labeled with retirement savings plans indicating a nest egg of savings

Should you diversify your retirement income? In a word, yes.

I know you've heard the old saying, "Don't put all your eggs in one basket." That phrase brings to life the concept of diversification, a basic tenet of investing. However, it's not necessarily a top-of-mind concept when it comes to retirement income discussions. It should be. In fact, diversification can be a cornerstone, whether you're accumulating or utilizing your portfolio.

Here are five reasons to 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 can be a game changer. Build a plan that includes sources of both taxable and tax-free income streams. 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, municipal bonds, permanent life insurance and careful use of retirement plan and IRA distributions could all be part of the mix.
  3. Guaranteed income streams provide peace of mind. 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 Social Security, employer pensions, military retirement, certificates of deposit and immediate annuities. But guaranteed often comes with trade-offs ...
  4. Inflation is doing heavy lifting in the background. Unfortunately, many guaranteed streams of income don't account for inflation. Military retirement and Social Security are notable, and extremely valuable, exceptions, but most 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 rationale for diversifying your retirement income streams.
  5. Even Social Security requires important decisions. According to the Social Security Administration, 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, leverage retirement credits and understand survivor benefits to make the most of your own Social Security benefit.

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

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