How to Optimize Your Investment Portfolio for Income

: When it’s time to retire, you’ll need to rebalance your portfolio for income. But what exactly does that mean, and how should you approach it?

Balancing for Income

As the term suggests, optimizing (or balancing) your portfolio for income involves rearranging your assets to generate income for you. This is ideal for retirees, since it should allow you to live off your investments indefinitely. It’s also a useful way to supplement your primary income temporarily if you need the extra cash.

Usually, you’ll have three goals in mind with this approach:

  • Maximizing income. First, you’ll want to make as much money as possible. Assuming your initial capital remains the same, you’ll want to optimize your portfolio so that it can generate more income for you on a regular basis.
  • Stabilizing income. It’s also important to find a way to stabilize that income. Many common investment choices are volatile, making them unsuitable in this regard. How can you streamline your income so you get something predictable each month?
  • Preserving your capital. You’ll also want to take efforts to preserve, or ideally grow your initial capital. Let’s say you start with $2 million and you build a portfolio that can generate $60,000 annually. How can you make sure that $2 million remains intact?

How can you achieve these?

Rental Property Income

One of your best options is to invest in rental property. Purchasing a residential rental property and finding a tenant to fill it allows you to collect income in the form of monthly rent; typically, you’ll be able to charge more than you’re paying in monthly expenses for the property. If you have a portfolio of many rental properties, you’ll be able to multiply that rental income. Plus, if you ever need the extra cash or if you want to rebalance, you can sell a property immediately to raise the funds.

The biggest drawback with rental property is the need to maintain each unit; this can take hours of time that retirees would prefer not to spend. Fortunately, you can mitigate this with the help of property management companies, which can take care of most rental property management responsibilities on your behalf for a fraction of your monthly rental income.

Dividend Stocks

You can also invest more heavily in dividend-paying stocks. Stocks represent shares of ownership in companies, and many large, stable companies distribute profits to shareholders in the form of quarterly dividends. For example, you might earn a 4 percent annual dividend from the stock of a major financial institution; for every $100,000 you have invested, you’ll earn $4,000 annually this way. You’ll also benefit from increasing share prices—a convenient way to preserve and grow your capital.

The biggest weakness here is individual stock volatility; there’s no guarantee this company will be around forever, or that their dividends will continue. You can mitigate this risk by investing in a broad range of different dividend-paying stocks.

High-Yield Bond Funds

High-yield bonds, or junk bonds, tend to carry higher risk than their stable counterparts, but in exchange, they have a much higher, more reliable interest rate. Bonds function like loans to companies and organizations, allowing you to earn income in the form of a predictable percentage of your initial investment.

If you want to avoid the higher risk of high-yield bonds, the best approach is to invest in bond funds, which expose you to many different bonds at once. This way, if any single bond fails, you likely won’t feel the immediate impact.


There’s also the possibility of pursuing an annuity. There are many different types of annuities, but most of them work the same way. You’ll make an initial investment in exchange for a fixed, regular payment for the rest of your life. For example, in exchange for $1 million, you might be able to earn $30,000 a year for the rest of your life, guaranteed for a fixed period of time.

Annuities are great because they promise you a fixed income. However, there are some drawbacks. For starters, you may not have access to your initial principal. You may also not be able to earn as much as you could with other investment types.

The Importance of Diversification

No matter what strategies you use to optimize your portfolio, one of your most important guiding principles should be diversification. Portfolio diversification is the practice of investing in many different types of assets—that way, if you experience underperformance or unexpected losses in one area, it won’t affect your broader portfolio too much. This should still be one of your highest priorities, even as you balance your portfolio for income; use a mix of different tactics to make sure you get the best of all worlds.

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