5 best retirement income strategies

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Planning for retirement can be daunting. According to Bankrate’s 2024 Retirement Savings survey, 35 percent of American workers predict they will need more than $1 million to retire comfortably, knowing that they will be able to cover their expenses. Another 23 percent say they don’t know how much they will need.

Having a well-thought-out income strategy for retirement can alleviate much of this stress. By understanding the various sources of retirement income and how to effectively use them, you will be one step closer to a stable and comfortable retirement. Working with a top financial advisor can also help you craft a successful investing plan for your future retirement.

Let’s explore the different types of retirement income, highlight five top strategies for generating retirement income and provide practical tips for implementing these strategies. 

Types of retirement income

Social Security

Social Security is a cornerstone of retirement income for many Americans. Benefits are based on your highest 35 years of earnings, and you can start claiming as early as age 62 or delay until age 70 to receive higher payments. While it’s a reliable income source adjusted for inflation, it typically covers only a portion of retirees’ expenses. Your earnings history, the age you start collecting benefits and whether you continue to work during retirement are all factors that can impact your benefit amount.

Pension income

Pension income comes from defined benefit plans, which provide a fixed monthly payment based on your salary and years of service. Pensions offer stability and predictability, often with inflation adjustments. 

However, they are becoming less common, and concerns about the financial health of certain pension funds can arise. Pension income is typically calculated using a formula that considers your years of service, final average salary and a multiplier.

Annuity income

Annuities are financial products that can offer guaranteed income for life or a specified term. You can purchase them with a lump sum or through periodic payments. Immediate annuities start paying out immediately, while deferred annuities begin payments at a future date. Fixed annuities provide a guaranteed rate of return, while variable annuities’ payouts depend on market performance. 

Annuities can be a reliable income source, especially when paired with other retirement income streams. Keep in mind that annuities may come with higher fees than other investment products, so be sure to fully understand any annuity product before purchasing one.

Investment income

Investment income in retirement can come from various sources, including dividends from stocks, interest from bonds and capital gains. Bonds offer steady income with lower risk, while dividend-paying stocks provide regular income along with the potential for capital appreciation. A diversified portfolio can balance risk and return, helping ensure a stable income stream throughout retirement. You should regularly review and adjust your investment strategy to align with your income needs and market conditions.

5 top retirement income strategies

1. Bonds and dividend stocks

Investing in bonds and dividend stocks can create a stable retirement income. Bonds provide regular interest payments, and building a bond ladder with staggered maturity dates can help guarantee income. Dividend stocks offer the potential for capital appreciation and regular income through dividends. 

Best practices for investing in these assets include diversifying your holdings, regularly reviewing your portfolio and considering tax efficiency. Once you’re retired, you’ll likely hold a greater portion of fixed-income investments in your portfolio, but stocks can still help to provide growth and outpace inflation. 

2. Retirement account withdrawals

Managing your withdrawals from retirement accounts is crucial to maximizing income and minimizing taxes. You can employ several effective strategies, such as proportional withdrawals, in which you withdraw from taxable, tax-deferred and tax-exempt accounts based on their proportion of overall savings. 

Other strategies include the traditional approach of using taxable accounts first, followed by tax-deferred and then tax-free accounts, and capital gains management. The 4 percent rule provides a rough calculation of the amount of your savings you can withdraw each year while ensuring you won’t outlive your savings. Consulting with a financial advisor can help tailor these strategies to your specific situation.

3. Annuities

Annuities can be an essential component of a retirement income strategy, providing a guaranteed stream of payments. They are particularly useful for ensuring you don’t outlive your savings. 

Immediate fixed annuities give predictable payments, while variable annuities offer the potential for higher returns based on market performance. Deferred income annuities (DIAs) can be particularly beneficial when included in defined contribution (DC) retirement accounts, helping to delay Social Security benefits and maximize lifetime payments.

4. Real estate

Real estate investments can provide a steady stream of retirement income through rental properties and real estate investment trusts (REITs). Rental properties offer positive cash flow, tax advantages and a hedge against inflation. However, they require active management and come with risks like market fluctuations and unexpected expenses. 

REITs offer a more passive investment option with regular dividends and diversification across multiple properties. Both methods can be valuable components of a retirement income strategy, offering tangible assets that appreciate over time.

5. Combined approach

A combined approach to retirement income can offer the best of all worlds by diversifying income sources and managing risk. This strategy involves integrating various methods, such as interest and dividends from bonds and stocks, guaranteed income from annuities and rental income from real estate. 

Utilizing a combined approach can help ensure a steady cash flow to cover essential and discretionary expenses. It’s important to personalize this strategy based on your individual needs and preferences, leveraging both investment and insurance tools to build a reliable and sustainable retirement income plan. You may want to consider working with a financial advisor to help you create a plan that takes into account your individual situation and retirement goals.

Bottom line

Creating a plan for your retirement income is crucial to feel confident that you will have a stable and comfortable retirement. By understanding the various potential sources of retirement income and implementing effective strategies, you can create a plan for a reliable income stream to cover your expenses. 

Still, it is essential to regularly review and adjust your strategy to align with your changing needs and market conditions. With proper planning and a diverse approach, you can enjoy a worry-free retirement. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation