You might think you’re more prepared for retirement than you actually are. You might say, “I max out my 401(k) every year — that’s all I need to do, right?” Not quite. It’s a start, but it’s not the only thing you need to do to retire well.
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With issues like long-term care or other medical expenses potentially looming on the horizon — not to mention that living longer comes with the reality of paying rent longer or buying groceries well into your 80s — you’re going to need more money than what a 401(k) can provide.
Having multiple streams of income can help your golden years shine with security. But before you resign yourself to working multiple jobs when you’re supposed to be kicking your feet up or traveling the world, know that many income-generating strategies can be passive, allowing you to earn money with minimal ongoing effort.
GOBankingRates spoke with Colin Zizzi, CFP, AIF, CEPA, founder of Zizzi Investments, to learn more about what a multi-income retirement could look like.
Rebuilding Your Paycheck
When it comes to planning your retirement income, Zizzi suggests having a core number in mind — the income you were used to earning from your paycheck. He emphasizes that the ultimate financial goal in retirement should be recreating that paycheck, even after you’ve stopped working. This approach can help you reduce risk.
“The biggest risk early in retirement is ‘sequence of returns’ risk,” Zizzi explained. “Sequence of returns risk means having to sell investments or other assets when prices are down to fund your retirement plan. This often happens when someone is overly concentrated in only one asset class like stocks early in retirement.”
If your timing is unfortunate and you’re forced to sell assets in a down market at the beginning of your retirement, you risk outliving your money.
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Passive Income: Your Best Friend
While there are plenty of on-site job options for retirees who want to keep one foot in the workforce to generate extra cash or enjoy a chance to socialize — who knew some shift work here or there could also help you learn slang terms to wow your grandkids? — Zizzi highlights the importance of passive income as a way to diversify your revenue streams.
He’s a big fan of a two-pronged approach: diversifying assets or income streams, and diversifying account types (e.g. pre-tax, tax-free, and taxable).
“Diversifying assets helps to reduce investment risk (market risk) and longevity risk, whereas diversifying account types gives better control over taxes in retirement,” he said.
To maximize the potential of diversified income streams, Zizzi also advises creating buckets for expenses: one for “fixed” expenses — the needs — and the other for “variable” expenses, or the wants.
“I like the concept of having predictable income sources to cover fixed expenses and then keeping a healthy allocation to more growth-oriented assets like stocks or real estate to keep pace with inflation,” he said.
Zizzi favors using more predictable sources of income, like Social Security, pensions, annuities, and bonds to cover fixed needs. For your variable expenses, you can rely on assets like stocks or real estate.
Using Technology to Stay on Track
If the thought of doing all these calculations on your own feels overwhelming, Zizzi has good news for you. You can find powerful financial planning software to help you visualize possible retirement income scenarios.
“I think the only way to successfully know if someone has enough to retire is to run an individual plan based on their projected expenses and sources of income (revenue streams),” he said. “Ultimately, the rate at which they’re spending down their assets, also known as their withdrawal rate, is the biggest determinant of whether their assets will be projected to last.”
Zizzi points out that having diversified income streams can increase the likelihood of hitting your withdrawal rate target every year. He also recommends actively running your retirement scenario throughout your retirement years to avoid overspending — or even underspending.
“Someone being able to confidently spend their money in retirement without the lingering fear of running out of money is what I view as the barometer for success,” he said. “When someone can do this, I believe it is a good sign they have the appropriate retirement income plan and number of revenue streams.”
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: Here’s What a Healthy Multi-Income Stream Could Look Like in Retirement
