Diversify or Risk Running Dry: 12 Additional Income Streams For Your Retirement

According to a recent survey by Northwestern Mutual, people believe they’ll need around $1.26 million in order to retire comfortably. The million-dollar question (so to speak) is where, exactly, will all that money come from?

Just as it’s important to avoid concentrating too much of your portfolio in one particular investment or asset type, your sources of income in retirement should be varied as well—and for similar reasons. A 401(k), for example, is susceptible to market volatility. Meanwhile, Social Security payments won’t be enough to cover all your needs. Incorporating a variety of income sources can help balance risk while addressing your full financial needs in retirement.

Let’s look at how retirees can build a robust income strategy in retirement.

12 Ways To Generate Additional Income in Retirement

Your options for generating retirement income aren’t limited to traditional savings or investment vehicles. Here are 12 potential income sources you might want to consider incorporating into your retirement income plan.

1. Dividends

Some investments, including REITS and certain dividend-paying stocks, will pay investors a percentage of the profits on a regular basis (typically quarterly). The exact amount each investor receives will depend on how many shares are owned and how much profit the company earned over the previous quarter. If you own 200 shares and the company announces a $1 per share dividend payout, for example, you could expect to receive $50 in dividend payouts for the quarter or $200 in total dividend payouts for the year.

While the actual payout amount will vary based on market and company performance, incorporating dividend-producing investments into your retirement portfolio can help supplement your other sources of retirement income. Retirees may also appreciate the steadier, stable nature of dividend stocks, which have historically experienced less volatility than equity investments—though the tradeoff for less risk is lower potential returns.

2. Annuities

If you think of life insurance as a way to financially protect your loved ones from early death, consider annuities as a way to protect against an unexpectedly long life.

Annuities are common tools used by retirees to create guaranteed, lifelong income in retirement. It’s essentially a contract between you and an insurance company, in which you pay an initial lump-sum payment in exchange for future (or sometimes immediate) monthly premium payouts. Some annuities may be bought with monthly payments as well—as opposed to a lump-sum amount.

Annuities come in many shapes and sizes, which will determine how much you receive over time. For example, some annuities may invest in the market while providing critical downside protection. In exchange, they often limit the upside potential. Other annuities will provide a guaranteed minimum interest rate and fixed periodic payments, which may offer more reliability but little opportunity for growth.

3. Bonds

Bonds are one of the traditional asset classes alongside equities (stocks) and cash or cash equivalents. In addition to paying back the principal amount after reaching the date of maturity, bonds typically provide investors with a fixed interest rate throughout the bond’s lifetime. Because they offer this steady, fixed income, they’re often considered an essential component of a diversified retirement income strategy.

4. Life Insurance

If you have a whole life insurance policy with a cash value, you may be able to withdraw a portion of that cash value to use as income in retirement. As long as what you withdraw doesn’t exceed what you’ve already paid into the policy, your withdrawals may even be tax-free. If you withdraw earnings or growth within the account, however, your withdrawals will likely be subject to ordinary income tax.

While your insurance policy’s cash value can serve as a source of income in retirement, it’s not without its drawbacks. Namely, what you withdraw from the cash value will be deducted from your beneficiary’s death benefits. For most retirees, the death benefits are the reason they have a life insurance policy in the first place.

Whole life insurance policies also tend to come with high premiums and fees. If your end goal is to generate income in retirement (as opposed to leaving a large death benefit for surviving loved ones), you can do so using brokerage accounts or retirement accounts with fewer fees. 

5. Defined Benefit Pension

Defined benefit pension plans are becoming increasingly rare, though some employers (like the government, school districts, and certain unionized jobs) still offer them.

If your employer offers a pension plan, this is certainly an advantage for your retirement income strategy. Similar to an annuity, plan participants will generally have the option to either receive fixed monthly payments or a lump-sum payment in retirement. 

6. Defined Contribution Plan

Most employers offer an employer-sponsored retirement plan such as a 401(k), 403(b), or Thrift Savings Plan (TSP).

Defined contribution (DC) plans are often one of the primary sources of retirement income, and many employers will match employee contributions up to a certain percentage—meaning more free money for retirement.

Even if your employer doesn’t match your employee contributions, participants still get a tax advantage. Traditional 401(k)s and other DC plans allow participants to deduct the initial contribution from their taxable income immediately. Anything earned in the account grows tax-deferred, and tax is only collected once withdrawals are made in retirement.

Roth plans, like a Roth 401(k), work a little differently. Contributions are not tax-deductible, but qualified withdrawals in retirement are tax-free.

7. Social Security Benefits

Starting at age 62, you’ll be eligible to begin collecting Social Security benefits—as long as you or your spouse paid into the FICA payroll taxes during your working years. If you’re able to delay collecting benefits, it may be worth waiting until full retirement age or longer to start. Full retirement age for most people is 67, though you’ll maximize your monthly benefits if you wait to collect until age 70.

Social Security benefits may not provide enough to cover all of your financial needs in retirement, but they do play a critical role in your overall retirement income strategy. Not only are they guaranteed, steady income you’ll receive for life, but they also receive cost-of-living adjustments each year as well.

8. Rental Income

It’s not uncommon for people in retirement to generate passive income through rental properties. If you live in an especially tourist-friendly area or desirable neighborhood, you may be able to list your property on a short-term rental site and charge a premium for vacation stays.

Or, you may enjoy the steadier pace of a long-term rental, which offers more income reliability and less tenant turnover. In either case, rental income is one way to create income in retirement that’s not dependent on market performance. Plus, you own a tangible asset that may, eventually, be sold for a tidy profit. 

9. Home Equity Line of Credit (HELOC)

Home values have increased in recent years, meaning your family’s home may have accumulated significant value over time. In certain circumstances, it may make sense to tap into some of that equity as a way to supplement your retirement income.

A home equity line of credit (HELOC) enables you to essentially borrow against the value of your home. At times when your portfolio is hit hard by market volatility, for example, it may be unwise to make withdrawals. A HELOC could help you cover temporary income gaps while preserving more of your portfolio long-term.

10. Reverse Mortgage

Unlike a traditional mortgage, you do not make monthly payments to a lender with a reverse mortgage. Rather, the lender pays you instead, using your home as collateral. Here’s another way to think about it: Instead of paying down a balance, you’re building up a loan balance based on the amount paid out, plus interest and fees. 

The monthly payments you receive from your reverse mortgage are yours to use as you please—which is why this special type of loan is geared towards those living in retirement. Payment for the loan will be due once you are no longer living in the home. Typically, the retiree or their heirs will sell the home and use the funds to pay back the balance of the loan. 

11. Royalties

You have many options for earning passive income in retirement, including collecting royalties. If you produce artwork, music, patents, or other intellectual property, you may be able to sell the rights to your work and receive royalties in return.

12. Explore Entrepreneurship

If you’re not quite ready to say goodbye to your working years, you could continue earning money in retirement by freelancing, picking up a part-time job, or starting a business. Depending on your skills and interests, you may have little overhead or initial upfront costs for getting started—making this an even more appealing option for retirees. 

How To Decide Which Income Streams Are Right for You

Not every income stream will be right for everyone in retirement. For example, Quentara Costa, CFP, founder of POWWOW, LLC, cautioned retirees about the time and energy commitment of owning an investment property. “Managing a second property, especially one intended for rental, is often more complicated and time-consuming than people anticipate.” 

She continued, “Today’s real estate market makes it hard for the average investor to generate consistent, passive income when balanced against the cost of maintaining the property and losing access to the equity.”

When considering what income streams fit your retirement income goals, Aaron Terwedo of TFS Advisors reminded retirees about the importance of pursuing options with varying tax treatments. 

“Diversifying income sources is a similar concept to diversifying your investments, and having diversification in income allows you to possibly tax-plan to give less money to the IRS.” He explained that, ultimately, a retiree’s income should fall into three tax buckets: tax-free, capital asset (meaning it’s taxed as a capital gain), or ordinary income asset (taxed as ordinary income).

Terwedo says other factors to consider when choosing income streams for retirement include:

• How much risk you’re willing to (or need to) take on
• How much you plan on pulling from your investments
• Your sources of fixed or guaranteed income (Social Security, pension plan, etc.)
• Any existing health concerns that could require ongoing care and treatment
• Your spouse’s age

The Bottom Line

The exact amount of money you need to enjoy retirement will depend on a number of personal factors. Whether you have a few years or a few months until it’s time to leave work behind for good, it’s never too early to make a plan, research your income options, and consider the most tax-efficient way to cover your needs in retirement.