At Cardinal Advisors, one of the most important conversations we have with clients is this: How do you turn your retirement savings into reliable income?
Saving diligently during your working years is only part of the journey. Planning how to use those savings wisely during retirement is what creates true financial security.

In this article, we’ll walk you through the seven major financial asset classes that retirees use to generate income, discussing the advantages, disadvantages, and strategies for each.

1. Cash Reserves

Cash plays a crucial role in any retirement income strategy. It provides immediate liquidity for emergencies and unexpected expenses without the risk of market loss. Financial planners often recommend holding six months to one year’s worth of living expenses in cash. Cash savings, especially those held in FDIC-insured accounts, offer minimal risk and easy access. However, the major downside is the low return. Money sitting in cash often fails to keep up with inflation, causing your purchasing power to decline over time. While it is vital to maintain sufficient cash for emergencies, holding too much can actually erode your wealth.

2. 401(k)s and IRAs (Pre-Tax Retirement Accounts)

For most retirees, the bulk of their savings resides in tax-deferred accounts like traditional 401(k)s and IRAs. These accounts have been powerful tools for accumulating wealth because they allow investments to grow without annual taxation. Contributions often reduced taxable income during working years, making saving even more attractive. However, these accounts come with significant drawbacks. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions (RMDs) beginning at age 73 force withdrawals whether you need the money or not. While 401(k)s and IRAs help build wealth, they require careful planning to avoid higher taxes during retirement and burdensome tax consequences for heirs.

3. Roth IRAs and Roth 401(k)s

Roth accounts combine the benefits of tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs and 401(k)s, contributions to a Roth are made with after-tax dollars, meaning taxes are paid upfront. Once the money is in a Roth account, it grows tax-free, and future withdrawals are generally tax-free as well. Roth IRAs also have the additional advantage of no RMDs during the account holder’s lifetime, offering greater flexibility in retirement planning. However, the downside is that you must pay taxes upfront, and new Roth accounts have restrictions on when earnings can be accessed. For many retirees, carefully planned Roth conversions can be an essential tax-saving strategy.

4. Taxable Investments (Brokerage Accounts)

Taxable investment accounts, often called brokerage accounts, offer another important tool for retirement income. Unlike retirement-specific accounts, these accounts have no contribution limits and no restrictions on access. Investments inside these accounts generate taxable income annually through dividends, interest, and realized capital gains. One advantage of taxable investments is their flexibility—you can sell assets when needed and only pay taxes on the gains, often at favorable long-term capital gains rates. Another key benefit is the step-up in basis at death, which can significantly reduce taxes for heirs. However, ongoing taxation and limited creditor protection make careful tax management important.

5. Cash Value Life Insurance

Permanent life insurance policies, such as whole life or indexed universal life, can be a strategic asset class for retirement income planning. Over time, these policies build cash value that grows tax-deferred and can be accessed tax-free through policy loans if structured properly. Life insurance can act as a form of forced savings and offer additional benefits such as a tax-free death benefit for heirs and optional long-term care riders. However, cash value policies require a long-term commitment and are not meant for short-term liquidity needs. They work best when incorporated into a broader retirement income and estate planning strategy.

6. Immediate and Deferred Annuities

Annuities are financial contracts designed to provide guaranteed income, making them an important tool for retirees concerned about longevity risk—the risk of outliving their money. With an immediate or deferred annuity, you can convert a lump sum into a steady paycheck for life, supplementing other income sources like Social Security. Annuities provide security and insulation from market volatility. However, they come with drawbacks, particularly regarding liquidity. Once funds are committed to an annuity, accessing them can be costly or difficult without penalties. Annuities should only be used as part of a larger plan where liquidity needs have already been addressed elsewhere.

7. Income-Producing Real Estate

Owning real estate that generates rental income can add diversification and inflation protection to a retirement portfolio. Over time, real estate tends to appreciate, and rental income can rise with inflation. There are also valuable tax benefits, such as depreciation deductions. However, real estate ownership requires active management and involvement, even if property managers are hired. Additionally, real estate is highly illiquid compared to other asset classes, making it more challenging to access cash when needed. While real estate can be a valuable income source for those willing to put in the work, it must be approached with clear-eyed planning.