How to Use Diversified Investments to Build a Balanced Retirement Income Plan
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Well-diversified retirement income strategies aren’t just for the ultrawealthy. Retirement savers and retirees with modest portfolios can incorporate a mix of investments to balance growth, stability, and dependable passive income sources.
Stocks
Income from stocks during retirement comes in two primary forms: proceeds from their sale and dividends. While many retirees do prefer a lower equity allocation to reduce portfolio risk exposure, stocks can be a useful tool for preserving purchasing power. Dividend-paying stocks, in particular, can generate passive income while also offering potential capital appreciation and inflation protection.
Bonds and Alternative Fixed-Income Investments
Bonds can play a critical role in a retirement income plan, offering predictable income and lower volatility than stocks. Some retirees use a bond laddering strategy, buying bonds with staggered maturities to create a steady income stream while mitigating interest rate risk.
Treasury, municipal, and investment-grade corporate bonds are common choices, with municipal bonds offering tax advantages for some investors.
Beyond traditional bonds, alternative fixed-income investments can provide additional diversification and yield:
Private credit funds allow investors to earn income from loans made to businesses, often with higher returns than publicly traded bonds.
Real estate debt funds invest in mortgage-backed securities or provide direct lending to real estate developers. Their performance is tied to property markets rather than the stock market.
Structured notes, which combine debt instruments with derivatives, offer a more customized risk-return profile and may provide some downside protection.
While these alternative fixed-income options can enhance returns and reduce stock market reliance, they often involve varying levels of risk, liquidity constraints, and complexity.
These types of income-generating investments can be complicated, which is why retirees who are interested in diversifying their income sources may benefit from discussing their options with a financial advisor.
Real Estate, REITs, and Alternative Real Estate Investments
Rental properties can provide consistent cash flow to retirees, though they require active management unless handled by a property manager.
For retirees who prefer a more passive approach, real estate investment trusts (REITs) provide real estate exposure without direct ownership responsibilities. REITs generate income primarily through dividends, which are paid out from rental income or mortgage interest. Publicly traded REITs can be bought and sold like stocks through brokerage accounts, while non-traded and private REITs may require direct investment through financial firms or specialized funds.
Another option is a Delaware Statutory Trust (DST), which allows savers to reinvest proceeds from an investment property sale through a 1031 exchange. This can help defer capital gains taxes while providing a share of rental income from professionally managed properties.
Like stocks, real estate can be a hedge against inflation, as property values and rental income tend to rise over time.
Annuities
Annuities can provide guaranteed income for life or a set period. They are often used as a financial safety net by retirees who are worried about outliving their savings.
There are many different annuity options, each with varying costs, fees, and liquidity restrictions. Retirees who are interested in guaranteed annuity income may want to consult with experienced retirement planners before purchasing.
Creating a Safety Net of Liquid Assets
Retirees who rely heavily on market-based income may want a larger cash cushion, while those with pensions or annuities may not need as much liquidity. Some of the most popular options for a liquid safety net include:
High-yield savings accounts: FDIC-insured and immediately accessible for short-term needs.
Money market funds: Typically offer slightly higher yields than savings accounts while maintaining liquidity.
Short-term bond funds or CDs: Provide modest returns with relatively low risk, though some have penalties for early withdrawal.
Cash-value life insurance: If applicable, policyholders can take tax-free loans against accumulated cash value in whole or universal life policies.
Maintaining multiple liquidity sources helps retirees cover unexpected medical costs, home repairs, or market downturns.
Maintaining Diversified Income Sources in Retirement Can Help You Weather the Unexpected
Overreliance on a single source of income during retirement, even one that’s currently stable, can be risky. A well-diversified approach that combines elements of different income sources can provide financial stability throughout retirement.
Retirees in Phoenix, Peoria, Tempe, or Scottsdale who are seeking advice on income-generating investments can schedule a meeting with Fullerton Financial Planning by calling (623) 974-0300. You can also sign up for a seminar or webinar through our website to learn more, or attend one of our upcoming events.