8 sources of income to generate cash flow in retirement

Why it’s important to diversify your income sources

To fully embrace retirement, it’s crucial to make sure you have a steady and reliable income that supports your desired lifestyle. But “income” shouldn’t just mean cashing Social Security checks and selling off investments. Instead, consider assembling a diversified portfolio of income streams—a financial Swiss army knife—to provide stability and peace of mind throughout your retirement years.

Just as diversifying investments can mitigate risk, having multiple income streams in retirement can help protect against market volatility, inflation, longevity risk, and unforeseen expenses. Diversification ensures that if one source underperforms or becomes unreliable, others can help fill the gap, maintaining your financial security.

8 sources of retirement income

Here are eight sources of retirement income to consider as you put together your financial Swiss army knife for retirement.

1. Dividend stocks

Stocks aren’t just for selling. Investing in dividend-paying stocks can provide a regular income, as companies distribute a portion of their earnings to shareholders. These dividends offer cash flow without the need to sell your investments, allowing your portfolio to potentially continue growing and benefiting from capital appreciation.

The potential for increasing dividends over time can help hedge against inflation, as some companies have a history of annual dividend increases. However, it’s important to note that dividend stocks are subject to market risk. Stock prices can fluctuate, and companies may reduce or eliminate dividends during economic downturns, which can impact your income stream.

2. Bond ladders

A bond ladder involves purchasing bonds with varying maturities. As each bond matures, the principal is reinvested into a new bond at the long end of the ladder. This strategy provides regular income through interest payments and helps manage interest rate risk by spreading out maturity dates.

Bond ladders offer predictable income and reduced interest rate risk compared to holding bonds with a single maturity date. Just keep in mind that fixed interest payments may lose purchasing power over time if inflation rises, which can erode the real value of your income.

3. Guaranteed lifetime income with annuities

Annuities are insurance products that can provide a steady income stream for life, effectively providing “pension-type” income. They are designed to convert a lump sum of money into predictable income that you cannot outlive. Immediate annuities begin income payments almost immediately after a lump-sum investment, providing quick access to funds. Deferred annuities, on the other hand, allow your investment to grow tax-deferred before income payments begin at a future date, potentially increasing the amount you'll receive.

Certain annuities can be customized with options such as inflation adjustments or even growth tied to a market index. However, annuities come with liquidity constraints: If you decide you need to withdraw the money you put into your annuity, you may have to pay a surrender charge and/or an income tax penalty. They may also include fees and expenses like administrative fees and mortality expenses. Additionally, unless payments are adjusted for inflation, fixed income from annuities may lose purchasing power over time. Guarantees are based on the claims-paying ability of the issuing company.

4. Maximizing Social Security benefits

Social Security remains a foundational income source for many retirees. Understanding and implementing strategies to maximize your benefits can have a significant impact on your retirement income.

Delaying the start of your Social Security benefits beyond your full retirement age (up to age 70) can increase your monthly benefit through delayed retirement credits. Each month of delay boosts your benefit by a certain percentage based on your birth year. Married couples can maximize household benefits by strategically coordinating the timing of each spouse’s claim.

It's also important to be aware of the earnings test. Earning income before reaching full retirement age can temporarily reduce your benefits, so timing your retirement and understanding the implications is crucial. Consulting with a financial professional or using the Social Security Administration’s calculators can help you decide the optimal time to start benefits based on your situation. Careful planning around when and how to claim Social Security can significantly enhance your financial stability during retirement.

5. Leveraging whole life insurance

Whole life insurance might be considered a “Swiss army knife” on its own, as it isn't just about providing a death benefit–it can also be a valuable asset during retirement. Over time, whole life policies build cash value that can be accessed through loans or withdrawals, offering a source of funds that can supplement your retirement income. The cash value accumulates tax-deferred, potentially providing a substantial sum over the years. Policy loans are generally tax-free, and withdrawals up to the amount of premiums paid are usually tax-free as well.  Certain tax advantages are no longer applicable to a life insurance policy if too much money is put into the policy during its first seven years, or during the seven-year period after a “material change” to the policy.

Additionally, cash value growth is typically not subject to market volatility, providing a stable asset regardless of economic conditions. However, whole life insurance requires a long-term commitment, with consistent premium payments needed to build significant cash value. Loans and withdrawals can reduce the policy’s death benefit and cash value if not repaid, impacting the legacy you leave behind. Excessive borrowing could also lead to policy lapse and potential tax consequences. It’s important to work with a financial professional who can find the right policy for your family and help you tap the cash value the right way.

6. Pursuing part-time work or starting a business

Retirement doesn’t necessarily mean the end of earning income through work. Many retirees find fulfillment and financial benefits by staying professionally active. Opportunities include consulting or freelancing, where you can leverage your professional expertise on a flexible schedule, or monetizing hobbies by turning passions like art, music, or crafting into income-generating activities. Starting a small business can offer both financial rewards and personal satisfaction, allowing you to pursue long-held dreams or explore new ventures.

Engaging in part-time work provides additional income, helps you stay active and engaged, and offers social interaction. However, it does require a dedication of time and energy, even if on a flexible schedule. Starting a business may involve upfront costs and financial uncertainty, and earning income could affect Social Security benefits and tax brackets. It is important to weigh these factors when considering part-time work or entrepreneurship in retirement to ensure it aligns with your lifestyle goals and financial needs.

7. Rental income

Investing in rental properties or leasing out unused space can provide a steady income stream and potential tax benefits. Monthly rental payments can supplement your retirement income, and real estate may increase in value over time, adding to your net worth. There are also tax advantages, such as deductions for expenses like mortgage interest, property taxes, and maintenance.

However, being a landlord requires handling tenant issues and property upkeep, which can be time-consuming and stressful (though working with a property management company can remove some of the hands-on aspects of being a landlord). Further, property values and rental demand can vary with market fluctuations, affecting your income and investment's value. Real estate is not as easily sold as other investments, posing liquidity concerns that you should consider before investing.

8. Strategic withdrawals from retirement accounts

Withdrawing from your accounts is not a simple matter of selling off investments when you need money. You’ll need to be strategic in how you withdraw from retirement accounts like 401(k)s or IRAs to ensure your funds last throughout retirement.

Required Minimum Distributions (RMDs) are mandatory withdrawals from tax-deferred retirement accounts that start at age 73 (as of 2023). Because these can impact your taxable income and potentially push you into a higher tax bracket, it’s important to balance withdrawals between taxable and tax-advantaged accounts to manage your tax bracket and extend the life of your portfolio.

When accessing your nest egg in retirement, also watch out for what’s known as sequence of returns risk—that is, selling investments when the market is at a low point. If the value of your investments has dropped, you will need to sell more of them to get the same amount of money. And that can seriously impact the longevity of your savings if it happens early in retirement.

Given these complexities, it’s important to work with a financial professional who can help you develop a withdrawal strategy that meets your income needs while preserving assets and minimizing taxes.

Crafting your personalized retirement income strategy

Every individual’s retirement needs are unique, and your income strategy should be crafted to meet those needs. To get started, assess your needs by calculating living expenses, including essentials like housing and healthcare, as well as discretionary spending for travel and hobbies. Consider inflation and plan for rising costs over your retirement to ensure your income keeps pace with your expenses. And consider how long your funds need to last based on life expectancy and whether you want to leave a financial legacy.

A financial professional can help you make these calculations and then work with you to develop diversified income strategies that cover these needs. They can also strike a balance between secure income streams with those with growth potential; account for taxes, market risk, and other concerns; and then help you tap those income sources in the right way and at the right time.

Retirement offers the opportunity to explore new horizons, spend time with loved ones, and pursue passions. By building a robust and diversified income plan, you can focus on enjoying this stage of life with confidence and optimism.

Neither New York Life Insurance Company, nor its financial professionals, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

RELATED CONTENT