Extracting income from a retirement portfolio can be challenging, especially when yields are so low. While a pure income approach may be the best solution to generate a livable cash flow for some, not all retirees can subsist on income alone. So, some retirees may need to consider other options for generating sustainable cash flow.

Morningstar’s director of personal finance Christine Benz lays out some different strategies that retirees may use for generating cash flow and the benefits and drawbacks of each.

The Income-Centric Strategy

Constructing a portfolio with the goal of producing income, then relying on whatever income distributions the portfolio provides, is what Benz calls “the old-fashioned way of generating income.” The advantage to this strategy is that it leaves the principal untouched. The disadvantage, however, is that income can vacillate significantly, which can be a problem for retirees looking for stable cash flows.

That leaves retirees with two options: Be content with whatever income their portfolios provide, or keep their portfolios’ yield production stable by taking on greater amounts of risk. Another risk inherent to the income-centric approach is that it omits low-yielding securities like growth stocks and short-term high-quality bonds that could diversify the portfolio.

The Pure Total Return Approach

In contrast to the income-centric strategy, the total return strategy builds a diversified portfolio made up of income- and capital-gains-producing investments, then reinvests the distributions back into the portfolio.

While a total return portfolio tends to be more diversified than an income-centric one, there will be years when a total return portfolio doesn’t appreciate enough to merit rebalancing. So, when that happens, it may be a good idea to have a cash bucket on hand during the lean times.

The Blended Strategy

The blended strategy brings together the two previously mentioned approaches. A retiree builds a total return-oriented portfolio with a mix of income- and capital-gains-producing securities, then funds living expenses with a mixture of income and rebalancing proceeds. If the portfolio’s organically generated income is insufficient, rebalancing proceeds can make up the shortfall.

The key drawback of this approach is that by spending income distributions rather than reinvesting them, the portfolio could be deprived of some return potential.


Benz writes that discussing annuities alongside these portfolio strategies is “like putting a pear in a bowl of oranges.” Buying an annuity requires parting with some assets for guaranteed cash flows, while the previous three strategies center around extracting cash flows from a conventional portfolio. Annuities also offer a baseline of lifetime income, which is something the other strategies can’t guarantee.

The lifetime income that an annuity provides is a huge benefit for retirees concerned about outliving their assets. Of course, there are drawbacks here as well.

“While plain-vanilla immediate annuities are transparent and can be inexpensive, many other annuity types are opaque and costly,” writes Benz, adding that an insurer’s creditworthiness, loss of control, and “the current low-yield, high-inflation environment” are also potential risk factors.

For advisors looking for retirement income options for their clients, Nationwide offers a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies within the major indexes.

For more news, information, and strategy, visit the Retirement Income Channel.