How Retirees Can Strategically Use Nonportfolio Assets: Morningstar's Benz

From Social Security to real estate, here's how to maximize every tool in the retirement-savings toolbox, according to Christine Benz.

Nonportfolio assets are important ways to stretch out investment portfolio assets, says Morningstar Director of Personal Finance Christine Benz in her June column, especially as today retirees more often only have only two sources of retirement income with the decline of pensions: Social Security and retirement investment portfolio assets.

Nonportfolio assets can give a retiree space to be more aggressive in their investment portfolio, depending on how much “safe” cash flow they produce, Benz says. However, there are many types of nonportfolio investments, and investors should understand how each works in improving regular cash flow, she says.

  1. Social Security (similarly, pensions and fixed annuities): the granddaddy of nonportfolio assets. As an income source a retiree’s Social Security is considered safe, but can’t be taken in a lump sum and the payout period is unknown. These assets, Benz suggests, reduce the amount retirees need to withdraw from their investment portfolios.
  2. Real estate (not including primary residence): Although typically looked at as part of an investment portfolio, it should be thought of as income to “augment” Social Security and pensions. Many retirees use rental income as a supplement, but it isn’t deemed “safe” as disruptions happen, such as renters moving out. There also is possibility of price volatility due to value. However, Benz points out, real estate is a good way to pass on property and wealth to the next generation. She sees real estate as something between an equity holding and a bond. In many ways it produces regular income like a bond, but can be disrupted like a stock.
  3. Business ownership interests: Benz notes that like business ownership interests are higher risk than real estate, and cash flows aren’t guaranteed. Further, the retiree might have to sell out their interest at a discount. The result is “individuals with significant business ownership interests should prioritize liquidity safety elsewhere in their investment portfolios,” Benz says.
  4. Variable annuities: Consider these a portfolio asset; however, when they do create a fixed stream of income, they can be used to lower cash-flow needs.
  5. Homeownership: Benz says that in 2010, home equity accounted for 30% of wealth in U.S. households. It shouldn’t be considered part of income flow, unless the retiree takes out a reverse mortgage, and then it can be considered regular cash flow like Social Security.
  6. Life insurance: Should be considered like cash, Benz says, as the amount can’t lose its value and earns a fixed rate of interest.

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