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How to diversify your retirement income portfolio

Many older workers and retirees are facing a "do-it-yourself" retirement, where you're on your own to figure out how to use your 401(k) and IRA to generate a retirement paycheck that lasts for the rest of your life. To meet this significant challenge, you might consider constructing a diversified portfolio of retirement income that will address your unique goals and circumstances.

You'll gain valuable insights about this strategy from a recent major study that's a collaboration between the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA). Full disclosure: I was a co-author of this study, along with Wade Pfau and Joe Tomlinson.

The table below shows how various retirement income generators (RIGs) meet common retirement income planning goals.


It's important to point out that no single RIG that has "yes" answers to every possible goal. Also, the "yes" and "no" answers for some RIGs tend to complement each other, which is one reason to diversify your retirement income to satisfy your unique goals and circumstances.

This table is intended to illustrate broad concepts, and the above ratings are generalizations. There can be exceptions to the ratings, and you might have good reasons to disagree with some of the answers. For example:

  • A systematic withdrawal program (SWP) with a very conservative withdrawal rate might have a good chance of lasting as long as you live.
  • A SWP invested entirely in government bonds (aka a "bond ladder") offers downside protection.
  • Some annuities have the potential for growth.
  • Work doesn't lend itself well to some of these goals and may present the most exceptions or disagreements.
  • Reverse mortgages have a potential for a legacy only to the extent that the value of the house exceeds the loan value when the home is eventually sold.

In case you're wondering about some potentially questionable rankings regarding maximizing your income:

  • Social Security ranks "yes" to this goal because most retirees can significantly increase their expected lifetime payout by delaying the start of benefits.
  • Annuities rank "yes" to this goal because you spend all of your principal over your lifetime. By contrast, with invested savings and rental property, principal typically remains unused at your death.
  • Work ranks "yes" to this goal because it gives you extra spending money and may enable you to delay starting Social Security or drawing down on savings. But a "no" answer would be reasonable as well.

The SCL/SOA study shows how you can quantify the trade-off between these goals and RIGs (although it didn't analyze working, rental income or reverse mortgages). For example:

  • You might increase the amount of your expected lifetime income by maximizing your Social Security benefits or buying an annuity. But in the process, you'll reduce the amount of savings you can access throughout your life.
  • You can increase the amount of income you might expect over your lifetime by raising the amount you invest in stocks, but you're more vulnerable to equity market crashes. Investing more in bonds should provide some downside protection but will reduce your expected lifetime income.

Here's one way to put all these ideas together:

  • Cover your basic living expenses with a floor of guaranteed lifetime income that you can't outlive and that won't decline when the stock market crashes. Such sources include Social Security, annuities and potentially bond ladders. These become the safe "bond" portion of your retirement income portfolio.
  • Cover your discretionary living expenses from invested savings with a high allocation to stocks.
  • Work just enough in your 60s and 70s to give you extra spending money, get you out of the house, nurture social contacts and delay drawing down Social Security and retirement savings as long as possible, up to age 70.
  • People who have the time, skill and temperament might consider investing in real estate rental property to diversify their income. Alternatively, real estate investment trusts (REITs) can be an easier way to invest for income with real estate.
  • People with low savings in 401(k) and IRAs but substantial home equity might explore a reverse mortgage to boost their retirement income.

You have a lot to consider regarding the task of generating a reliable, retirement income that might need to last 20 to 30 years or more. The SCL/SOA report can help you (or your advisor) build a diversified retirement income portfolio that meets your unique goals and circumstances. This will help you sleep better at night during your retirement!

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