How to Effectively Manage Sources of Retirement Income

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Sources of Retirement Income Graph

The Scenario: The reality of retirement is inevitable – especially for the post-baby boomers generations. With company plans a foregone luxury, people must now plan for nearly every penny of their retirement income. Without preparation, aged persons must work well into the seventies, well beyond the working age.

The Main Issue: Retirement for those who came before the baby-boomer generations was easy: find a job, work there for your career, and retire with a lucrative company plan that maintained your salary levels into retirement.Clearly, the times have changed, and people no longer enjoy a single source of income that can sufficiently sustain retirement. All of the retirement vehicles experience consistent pressure of losing their value, and thus, it is critical to actively manage all elements of your retirement:

  • Company Plans: This used to be a very lucrative source of retirement income until recently. Many companies like GM and Ford touted themselves for generous pension plans – but this has become a dream of the past. In fact, current retirees of these big auto makers find that their pensions are at stake, and an increasing number of employees are having their pensions bought out by the big three automakers. With changes in the labor supply and industry competition, retirement plans of many Fortune 500 companies are no longer sacrosanct.
  • IRA or 401K Plans: Touted as the key to managing your retirement, IRAs and 401K options are not risk-free. With significant value fluctuation depending upon the performance of the market, IRA and 401Ks are far from being a safe bet. As long as growth keeps in line with inflation, your portfolio value is stabilized. However, if a recession does hit, your IRA and 401K stand to lose a significant amount of value. In addition, depending upon how your 401K is invested, you could be at great risk for losing nearly all of your retirement portfolio value. For example, if you were a GM employee, you were forced to invest at least 50% of your contribution into GM company stock. When the stock price lost 75% of its value, your 401K plummeted too.
  • Real Estate: This is another attractive source of passive income. However, unless you owned income property from before the real estate boom, chances are real estate will not become a viable source of retirement income. With significant real estate prices, carrying a mortgage that can be covered by rent has become a circumstance of the past.
  • Social Security: Clearly, the future of Social Security is jeopardized, and thus, it is only a temporary source of retirement income. In fact, without any policy changes in DC, Social Security will be paying more in benefits than it will receive in income by the year 2017.
  • Financial Portfolio: Investing in the equities markets is an important element for achieving growth factors for your retirement funds. However, with the volatility of the market, it is again difficult to rely upon the stability of income payments from a financial portfolio.

The Culprits: Compounding all of the elements of uncertainty in your retirement instruments are the retirement culprits, issues that eat away at your nest egg and income. Some of these culprits you can control, while others are far beyond any portfolio’s grasp.

  • Inflation: This is the main retirement culprit that eats away at your nest egg. With rising energy and foods costs, expect CPI to continue to rise – which significantly hurts those retirees planning to live on fixed income.
  • Lifespan: With advances in medical care, people are living longer than ever – and the baby boomers are case in point. No longer is retirement planning sufficient for 15 or even 20 years, as an increasing lot of the population is living well into their 90s.
  • Healthcare: Unexpected illness and dramatic healthcare costs can significantly consume retirement funds. With the uncertainty of Medicare, more retirees will find the burden of healthcare falling upon their elderly shoulders and pocketbooks.

The Hero – Diversification: The key to overcoming the uncertainties of your retirement instruments, along with the culprits that whittle away your nest egg, is diversification. Ultimate diversification minimizes the risks through proper asset allocation, which applies throughout your overall retirement portfolio. The right way to plan for retirement is to create as many sources of income as possible – ensuring that if one avenue is depleted, another one can still flow income into your elderly years.

By implementing the appropriate diversification investment strategies, every working person – regardless of current income levels – can achieve a comfortable state of retirement. The key is to immediately take control of your retirement; actively managing your retirement vehicles is critical, especially considering that reliable retirement income no longer rests within one source.

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