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RETIREMENT INCOME

Portfolio reliance: The importance of diversifying income sources

Kate Beattie

November 5, 2024

KEY TAKEAWAYS

  • Retirees should be aware of how much they are relying on income from their portfolio to ensure they will have enough income to last their lifetime.
  • Investors heavily dependent on their portfolio for income can become more vulnerable to outside risks such as market volatility and high inflation.
  • The Portfolio Reliance Calculator can show various ways to reduce the reliance on a portfolio by diversifying sources of income.

What is portfolio reliance?

 

Portfolio reliance refers to how much an investment portfolio is relied upon for income, as opposed to outside sources such as Social Security and/or a pension. This concept is particularly important for retirees, who can no longer depend on a paycheck and must carefully monitor how much they rely on their portfolio, to ensure income that lasts.

What are the concerns that come with relying too heavily on a single source for income?

 

Relying too heavily on an investment portfolio for income can expose investors to outside risks such as market volatility and inflation. Without having protected income sources, investors may need to reduce withdrawals to preserve their portfolio, which is especially worrisome if they are dependent on that income to cover basic expenses. This lack of protected income can create financial strain, particularly in uncertain economic conditions.

What can an investor do if they are concerned about how reliant they are on their investment portfolio?

 

There isn’t a one-size-fits-all reliance rate, but in general the higher the reliance on your portfolio for income, the more sensitive you may be to market fluctuations. To help mitigate this risk, here are some strategies retirees can explore to reduce their reliance on portfolio income and diversify their sources of retirement income:
 

  1. Consider transferring some of the risk by adding insurance protection from an annuity, such as a variable annuity with protected lifetime income. By allocating a portion of money into an annuity, it takes the pressure off other income sources. Read how retirees have found greater peace of mind by having annuities as a source of protected income: Understand what gives clients peace of mind in retirement.
  2. Review your plans for Social Security as it’s a key source of protected income in retirement. Claiming benefits early can reduce them, while delaying can increase them. It is crucial to help clients understand their options before making a decision.
  3. The Portfolio Reliance Calculator can show ways to reduce the reliance on a portfolio by diversifying sources of income. It can provide a point-in-time estimate of the withdrawal rate a retiree needs in order to withdraw from their investment portfolio and still meet their annual income objective, as shown in this chart.

 

The output from the Portfolio Reliance Calculator tool shows a hypothetical retirement income plan. The hypothetical total retirement income investment portfolio is $1,000,000. The total annual retirement income objective is $60,000. The potential portfolio allocation includes an investment portfolio value of $670,000, a variable annuity allocation of $330,000, a 5% guaranteed withdrawal rate from the variable annuity of $16,500, and a total annual protected lifetime income amount of $36,500. Chart shows two results for a hypothetical investment portfolio of $1 million and a yearly retirement income objective of $60,000. One result shows a potential withdrawal rate of 4% with $40,000 of annual withdrawals from the portfolio, and $20,000 protected income coming from Social Security. The other shows a potential withdrawal rate of 3.51% with $23,500 from the portfolio, $16,500 from annuity income, and $20,000 protected income from Social Security.
These hypothetical results are for illustrative purposes only and in no way represent the actual results of a specific investment or total portfolio.

†Protected income is income that can last a lifetime from sources such as Social Security, pensions and annuity guarantees.

To learn more about how much an investor can withdraw from their portfolio and the factors they should consider when planning their withdrawal rate, see our 3 key considerations for sustainable retirement income Insights article.

Read important disclosures

KTEB

Kate Beattie is a senior retirement income strategist with 17 years of investment industry experience (as of 12/31/2023). She holds a bachelor’s degree in economics with a business administration minor from Colorado State University and holds the Certified Financial Planner™ and Retirement Income Certified Professional® designations.

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Variable annuities are long-term investment products designed for retirement purposes and are subject to market fluctuation, investment risk and possible loss of principal. Variable annuities contain both investment and insurance components and have fees and charges, including mortality and expense, administrative and advisory fees. Optional features are available for an additional charge. The annuity’s value fluctuates with the market value of the underlying investment options, and all assets accumulate tax deferred. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Withdrawals will reduce the death benefit and cash surrender value.
 

Variable annuities may impose a variety of fees that may affect the growth of the portfolio. Variable annuities have investment and/or withdrawal limitation requirements. Early withdrawals may incur a fee. Guarantees are subject to the claims paying ability of the insurance company.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
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