Fidelity Reveals Top 3 Sources of Retiree Income Today: Should You Diversify Yours?

In the ever-evolving landscape of retirement planning, fidelity Investments has shed light on the top three sources of retiree income today. As we navigate through 2025, with a record number of Americans reaching traditional retirement age, understanding these sources and the implications for future retirees is crucial. Let's dive into the details and explore why diversifying your income streams might be the smartest move you can make.

The Top Three Sources of Retiree Income

1. Social Security: This remains the most reliable and predictable source of income for retirees. It provides a steady stream of payments that can help cover essential expenses like housing, food, and healthcare.

2. Pensions: For those fortunate enough to have them, pensions offer a guaranteed income stream that can significantly ease the financial burden of retirement. However, pensions are becoming less common, making them a less reliable source for future retirees.

3. Retirement Savings from IRAs, 401(k)s, or Other Workplace and Small Business Plans: This is where the shift is happening. More and more retirees are relying on their own savings to fund their retirement. This shift underscores the importance of proactive saving and investing.

The Implications for Future Retirees

The reliance on retirement savings from IRAs, 401(k)s, or other workplace and small business plans is a significant shift from traditional retirement income sources. This means that future retirees will need to be more proactive in saving and investing for their retirement. The rising cost of living and health care expenses, as highlighted by Fidelity's study, will require future retirees to have a more diversified and robust retirement plan to ensure financial security in their golden years.

Why Diversify Your Income Sources?

Diversifying your income sources can mitigate the risks associated with relying on a single or limited number of income streams. Here are some strategies to achieve this diversification:

1. Combine Fixed and Variable Annuities: Fixed annuities, like TIAA Traditional, grow at a steady rate and guarantee monthly income throughout retirement, providing a stable source of income. Variable annuities, such as CREF or TIAA Real Estate, offer the potential for higher payouts if their underlying investments perform well, but they come with more risk. Combining these two types of annuities can help balance potential risk and return levels.

2. Set Aside Cash Reserves: Set aside one year of cash to supplement your annual income from annuities, pensions, Social Security, rental properties, and other recurring sources. This cash should be held in a relatively safe, liquid account, such as an interest-bearing bank account or money market fund. With this cash on hand, you won't have to worry as much about the markets or a monthly paycheck. You can spend from this account and replenish it periodically with funds from your investment portfolio.

3. Create a Short-Term Reserve: Next, create a short-term reserve in your investment portfolio equivalent to two to four years' worth of living expenses, again after accounting for other regular income sources. This money can be invested in high-quality, short-term bonds or other fixed income investments, such as short-term bonds or bond funds. Or, if you'd rather manage individual investments, you might want to create a short-term CD or bond ladder—a strategy in which you invest in CDs or bonds with staggered maturity dates so that the proceeds can be collected at regular intervals. When the CDs or bonds mature, you can use the money to replenish your bank account.

4. Invest the Rest of Your Portfolio: With a year's worth of cash on hand and a short-term reserve in place, invest the remainder of your portfolio in investments that align with your goals and risk tolerance. Your overarching goal here should be to hold a mix of stock, bond, and cash investments that can generate growth, provide income, and preserve your capital.

Conclusion

As we move forward, the importance of diversifying your income sources cannot be overstated. By combining fixed and variable annuities, setting aside cash reserves, creating a short-term reserve, and investing the rest of your portfolio wisely, you can mitigate the risks associated with relying on a single or limited number of income streams. This approach ensures that you have a stable income source even during market fluctuations and can adapt to your changing needs over time.

So, if you're planning for retirement, take a closer look at your income sources and consider diversifying. Your future self will thank you.

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