Even those who have planned and saved and amassed sizable nest eggs likely would not turn down an extra $20,000 per year in retirement income. But the way some retirees allocate their retirement portfolios, they are leaving some money on the table.
It’s true that not all seniors could magically earn an additional $20,000 per year in retirement just by tweaking their asset allocation. However, for retirees with at least $1 million set aside, that figure might not be so far out of reach. Here’s a look at a few tricks you can implement to your retirement portfolio to boost your income, perhaps by as much as $20,000.
Approach Your Portfolio From the Perspective of Income Generation
Many retirees think of their portfolios in terms of risk management. While it’s true that you have to protect the money you have by the time you retire, if you’re too cautious, you might end up doing more harm than good. While conservative investments such as Treasury bills can prevent you from losing your capital, you’re trading one risk for another.
For one thing, owning low-yield investments subjects you to the value-diminishing effects of inflation. While you will protect your principal, that principal won’t be worth as much in terms of purchasing power in the future.
Another risk you take by being too conservative with your investments is that you will outlive your money. To maintain your quality of life, you’ll have to spend an increasing amount every year, thanks to inflation. But if your portfolio isn’t growing, you’ll have to start dipping into principal. Suddenly, that nest egg that you assumed would last 25 years might last just 20 — and if your life expectancy is 90, things might get tight for you financially.
That’s why it’s important to approach your portfolio from the perspective of income generation. This strategy involves looking at your lifestyle needs and coming up with an income that you can comfortably live on. From there, you determine how you can get that much income out of your portfolio.
Best of all, you won’t necessarily have to increase your risk level to achieve the income you need. You’ll just need to strategize the best way to get it.
Add More Income-Generating Stocks
Stocks can help provide you with the growth you need to make your money last for your entire retirement. However, putting all of your money into equities isn’t usually a sound strategy for most retirees. If you were to encounter a bear market, your portfolio value might drop by 20% or more, and that could permanently ruin your retirement income strategy. But there’s a way to balance out your risk while still bumping up your income, and it comes in the form of income-generating stocks.
Stocks that pay dividends are generally less volatile than the overall market because their underlying companies are usually large, mature and well-established, generating consistent cash flow. Many dividend-paying stocks will generate far more income than you can get from Treasury bills, and they also offer the potential for some growth as well.
For example, let’s take a simplistic version where you have a $1 million portfolio invested in Treasury bills paying 3%. This would generate annual income of $30,000. But if you switched just half of those T-bills into steady, dividend-paying stocks with a 6% yield, you’d generate $45,000, with the potential for growth as well. That’s an immediate boost of $15,000 in annual income.
Of course, you’ll have to tinker with real-world numbers to find the right income/growth/safety balance for you, in conjunction with a financial advisor. As of April 2023, for example, the one-year Treasury bill was actually paying close to 4.5%, the highest in decades. But even in this environment, there are much higher-yielding stocks as well, such as Verizon (6.51%), AT&T (5.58%), KeyCorp (6.55%) and Altria (8.46%).
Annuitize Your Portfolio
Another way to boost your retirement income is to annuitize it. Depending on the annuity you find, you can generally get rates well above what is being offered in the Treasury market.
Even better, with a fixed lifetime guaranteed annuity, you’ll receive payments for the rest of your life, no matter how long you live. This in and of itself eliminates the risk that you will outlive your income, something that is prominent with many other conservative investments.
You also won’t have to worry about market downturns affecting your portfolio. With an annual increase option, you’ll also remove inflation risk from your portfolio, as your income will rise in line with inflation.
The Bottom Line
No one solution works for all retirement portfolios, but you might be able to draw from the above ideas to both boost your retirement income and protect it in the process. Speak with a financial advisor to see what the right solution is for you, in line with your investment objectives and risk tolerance.
