Why Financial Advisors Say Retirees Need Multiple Sources of Income in 2026

There's never a bad time to diversify your income, particularly if you're a retiree needing reliable cash flow now and into the indefinite future.

The need for multiple ways to generate retirement income, however, has never been greater than it is right now. Here's a look at why, and what you need to think about doing if you're in or near retirement and are feeling uneasy about your financial future.

Why retirees need more than one source of income right now

Nothing about the warning is new. Money always seems to be tight, and the prospect of prolonged economic weakness always looms above.

These risks are more pronounced than usual right now, though, for a handful of pressing reasons.

1. Social Security is on the ropes

The threat of Social Security's inability to continue paying full benefits to its beneficiaries has been circulating for decades. Just in the past few months, however, it's not only become an even greater risk but also seems likely. The Congressional Budget Office says if nothing changes soon, payment cuts of 24% are inevitable by 2032, accelerating the CBO's previous calculation by one year.

No, it hasn't happened yet. You'll want to start working on another, or a bigger, alternative income stream for this possibility sooner rather than later. You'll need all the time you can get to either start a new, growing source of income or just invest this new income stream in growth so you can live on these additional savings when Social Security finally fails.

2. Market volatility is setting the stage for weaker returns

In the meantime, investors have a more pressing problem. That's the market itself. It's abnormally volatile right now, and valued abnormally high as a result, limiting its foreseeable upside. The S&P 500 is trading at a multiyear-high forward price-to-earnings ratio of nearly 22. That's at a time when Goldman Sachs says the index's average annual return over the next 10 years could be a mere 3%, weighed down by the advent of artificial intelligence that not only threatens jobs but also comes with steep upfront costs that may or may not pay off.

Connect the dots. To the extent retirees are living on capital gains, the proverbial party may soon be over, if it isn't already.

3. Living costs are up -- again

If you thought the inflation beast was finally tamed, think again. After seemingly stabilizing early this year, March's consumer inflation raced to a multiyear high annualized rate of 3.3%. It's expected to inch even higher at least through May, according to forecasts compiled by the Federal Reserve Bank of Cleveland. Now, Social Security's cost-of-living adjustment (or COLA) of 2.8%, put in place at the beginning of this year, doesn't seem big enough, or soon enough.

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There's nothing that can be done about price increases. It's clear, though, that retirees are on their own to offset the full impact of inflation soon enough to matter. Social Security payments just aren't up to the task.

4. Life expectancy is rising again as well, reaching record levels

You may know that, for the first time in decades, the United States' average life expectancy fell during the COVID-19 pandemic. That clearly wasn't a permanent setback, though. Per the Centers for Disease Control's latest report on the matter, based on 2024's data, life expectancy in the U.S. now stands at a record-breaking 79.0 years.

There are two implications here. First, it means you're likely to live longer than you previously thought, raising the likelihood of outliving your money. And second, it means other people are apt to live longer as well, adding to the strain on programs like Social Security, healthcare providers, and insurers. Things are about to get more expensive.

Action plan

So, what does any of this mean in practical terms for retirees -- or anyone nearing that stage of their lives -- looking to establish multiple streams of reliable retirement income? Here are some of the first moves to consider.

1. Reallocating your dividend stocks and bonds

If you're an older investor at or near retirement, you likely already own a mix of dividend-paying stocks and/or interest-bearing bonds. Your mix, however, could almost certainly be optimized. For instance, you may find higher-yielding dividend stocks with comparable dividend growth at no additional risk. It's also possible your tax-free bonds are no longer worth their generally lower yields (or vice versa). Even adding 100 basis points' worth of net yield to a $100,000 portfolio means an additional $1,000 worth of income per year.

2. Reconsidering how and where your investments are held

It's not just what you own that matters, though. How you own it can also play a role in generating investment income optimally. As an example, it may or may not make sense to proceed with a planned conversion of an IRA to a Roth IRA now. Remember, most withdrawals from Roth accounts are tax-free regardless of your tax bracket, while all withdrawals from an ordinary IRA are taxed as earned income rather than investment gains. This means holding your income-generating investment in a Roth and leaving your growth holdings in a traditional IRA or 401(k) might minimize the tax burden of living on your entire nest egg's total returns. You'll just want to crunch a few numbers to figure out what makes the most financial sense for you.

3. Working

Finally, while it may not be an option most retirees want to consider, working a wage-paying job can solve a big cash flow problem with no permanent net downside. You can earn up to $24,480 in work-based wages this year without impacting your Social Security benefits, and even then, the Social Security Administration only -- and only temporarily -- reduces your benefits payments by $1 for every $2 you earn above that threshold. This job-based income also allows you to tuck more away for retirement rather than depleting your retirement savings by living on it, laying the groundwork for an even bigger stream of income in the future, when you may really need it.

Start with a budget-based plan and a specific income goal

Overwhelmed? Don't be. The matter is more manageable than you think. Just start with an income goal and work your way backward to figure out how you can realistically reach that mark this year without undermining your ability to produce enough retirement income in the future. You might be closer than you realize, even if Social Security benefits payments are cut in the foreseeable future.

This might help: Split your savings into "buckets," each with its own specific goal: short-term cash needs, productive (but safe) use of intermediate-term money, and growth investments you're willing and able to leave untouched for a few years. You'll move money from longer-term buckets to shorter-term ones as time marches on. This framework, however, actually helps you by allowing you to focus each pool on its own goal, while also forcing you to ensure each bucket remains full enough to meet your bigger-picture goal.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.