Diversify. Diversify. Diversify. We’ve all heard that diversifying our investment portfolio is the number one risk management rule, right? A combination of different investments, Canadian, US, International stocks, bonds, GICs, Gold, real estate, even infrastructure, we put them together so that when one area struggles, another part of the portfolio will help offset, or minimize the losses to the overall portfolio. If diversification is your number one risk management tool managing your investments, why don’t we apply the same risk management strategy to your income in your retirement years? Having spent all your working life to build a nest egg to support your retirement, you want to do everything you can to reduce your financial risk; not just the risk of your investment portfolio, but now also the risk inherent in your sources of income. In the quest to retire comfortably and remain comfortably retired, that’s where diversification of your income comes in.
Retirement doesn’t bring an end to unexpected financial events. Life has a funny way of upsetting even the best-laid plans. Suddenly incomes are asked to cover extraordinary unforeseen expenses, or one of your income sources struggles to continue producing the income you thought it would. Diversifying your income streams is one way to ensure that when life happens, you can continue to live comfortably.
Many people are in the two-source of income bucket. For instance, those with a great pension plan may just have their pension and government benefits. A true “fixed income”. But what if you have a large unexpected event? The roof needs fixing, a medical issue requires expensive care or uncovered prescriptions? Without additional sources of income, investments for instance, you don’t have options for covering those unexpected costs other than debt, if you qualify! Another common combination of two income sources include government benefits and whatever investments (including defined contribution pensions with an investment value rather than guaranteed income) they’ve saved. . The assets accumulated are subject to market risk and don’t guarantee a lifetime of income. Relying just on government benefits and investments can mean when those markets have declines, to generate your income in those bad years you may be forced to sell low (the exact opposite of successful investing – buy low, sell high) Experiencing market declines early in retirement have been shown to dramatically reduce the probability of that portfolio lasting as long as planned. If you identify with this two-income stream position, it’s not too late to diversify your retirement income plan.
Three income streams create a much smarter fallback strategy, as well as a greater sense of financial security. If one source of income stumbles, there are still two more running beside them. If that rental property you were counting on for income suddenly has a vacancy or needs repair, you will be able to draw from another source of income. If the market has a bad year, or the business you were so excited about never got off the ground, another of your multiple investment streams will supply the needed income. Creating multiple streams, specifically three income sources, might sound challenging. But, reconfiguring your income to accommodate real life is also critical – and doable. So what are some potential income sources to make up the right three for you? They may include:
- Employment income, if working part-time in retirement is in your near future plan.
- Business income from your own venture, that you either begin or continue in retirement.
- Employer, pensions
- Government benefits (CPP & OAS)
- Reallocating a portion of your investments or defined contribution pension plans to things like annuities or other strategies that provide a guaranteed lifetime of income.
- Real estate that generates rental income
- Investments like RRSPs, RRIFs, TFSAs, and non-registered accounts.
Basically, the old proverb “Don’t put all your eggs in one basket” is as true (or truer) in planning your retirement income and risk as it is in life. If you haven’t retired yet, you still have a head start on building your third income stream with intention. For those who are retired, perhaps restructuring your assets to add another income source is be possible. Your financial life can be a puzzle, but with at least three pieces, you can make it a more complete picture.