A Different Kind of Diversification Pays Off for Retirees

A Different Kind of Diversification Pays Off for Retirees

Retirement savers can get more income with less volatility using income allocation instead of asset allocation.

Jul 31, 2018

By Jerry Golden

Before you take the leap into retirement, you want to feel completely confident that your money will last. It’s natural to want to be sure you have enough saved, but rather than focusing on savings, you should be looking at how you’re going to create income instead.

The goal: Create more income with less volatility. It’s something I’ve been studying, and I have some exciting results to share.

In Part I and Part II in this series, I suggested that you could receive more retirement income with less volatility if you and your adviser move from a strategy of asset allocation to one of income allocation. Asset allocation is the traditional strategy in which you strive to have diversified investments to maximize and protect your assets. Income allocation, on the other hand, is a strategy in which you put together a plan with different sources of income that will be reliable and lasting in retirement.

We conducted a study comparing the results between asset allocation and income allocation strategies under various assumptions as to the retiree’s risk profile and market outlook. Not only did we observe more retirement income and less volatility with income allocation, but we also saw generally higher economic returns. A copy of the study is available for free when you register on the Go2Income website.

Having a higher economic return in addition to the features and “soft benefits” described below, makes a strong case for the income allocation strategy.

Sample Case:

For this article, we selected the following case from our study: Male, 70, who has $1 million in retirement savings, with 50% in a rollover IRA. His risk profile is conservative, with an asset allocation of 30% to equities, based on the “100 minus age” rule of thumb, and 70% to fixed income securities. 

We compared the asset allocation strategy to an income allocation strategy with a high allocation to income annuities. Both strategies assume identical market returns. 

Here are some highlights of the results of income allocation in this case: 

■ After-tax income is increased by 50% over the investor’s lifetime.
 Income volatility is reduced from 69% to 19%. 


The investor can spend the extra income or reinvest it to leave a legacy as much as 29% higher. Sound too good to be true? Let me walk you through the numbers and the explanation for these advantages.

Review of Income Allocation Strategy

The twin goals of income allocation are to increase the amount of after-tax (spendable) income and to reduce income volatility (for more dependability). These three steps distinguish the income allocation strategy from virtually all other retirement planning strategies.

1. Include income annuities as a new asset class and consider them as part of the allocation to fixed­ income investments, along with bonds and CDs.

2. Treat rollover IRA accounts differently than personal (after-tax) savings accounts in managing the equity portion of your portfolio.

3. Manage withdrawals from rollover IRA savings rather than simply taking the IRS-mandated required minimum distributions.

The advantages come from holdings that generate the highest amount of dependable, spendable income. The greater allocation to dependable income continues for the retiree’s life, with all the need for making any withdrawals from savings eliminated by age 85 – what should be the retiree’s worry-free age. 


The study goes into considerable detail on methodology and assumptions. We did develop two new key measures to examine this new strategy: 

Income Volatility: The percentage of income that is dependent on the market value of the underlying investments (such as stocks or bonds). Volatility can be up or down, good or bad, but in all cases, it makes your planning uncertain. 

Effective Rate of Return: The rate of return your savings would have to earn in an asset allocation plan to produce the income and legacy benefit that emerge, typically to a survival age the investor selects. There is a substantial increase in the effective rate of return under the income allocation strategy. 

What an Income Allocation does to an investor:

The case study summarized in Table 1 above quantifies the benefits for our investor. It shows an increase in first-year income of 21% (from $43,182 to $52,381) and a 32 percentage point decrease in income volatility. Of course, everyone is different and any conclusion you make should be based on an illustration designed specifically for you. 

The advantages derive from a focus on holdings that generate the highest amount of dependable, spendable income, as suggested in Table 2 below.


Beyond the numbers

While the study quantifies the dollar-and-cents advantages, the real upside may be the qualitative benefits that come with peace of mind. By providing more income with less volatility, investors can relax. They can feel confident, knowing that their income is less dependent on the market, continues for life and is more certain. 

Besides less “angst,” investors are much more likely to stay the course. One can imagine what investors might do during a major correction when 50% or more of their portfolio is dependent on market results. Typical retirement planning leaves the investor with plenty of uncertainty. 

If you have a question about how income allocation might work you, post your request on Ask Jerry.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost. 

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This article was written by and presents the views of our contributing adviser, not the Kipling er editorial staff. You can check adviser records with the SEC or with FINRA.