Investing is different when you retire. Unless fortune has graced you with a gold-plated company pension, you probably depend on a steady cash flow from your investments to help put food on the table and cover day-to-day expenses. That makes you, whether you realize it or not, an income investor.

Income investors tend to favor securities that pay a dependably attractive flow of interest, dividends and distributions. As an income investor, you become fond of GICs and bonds. When it comes to stocks, you often lean toward sectors with high payouts — income trusts and financial stocks, primarily.

Unfortunately, the performance of some of these income investments has been anything but dependably attractive over the past couple of years. Income trusts have been hit by changed tax rules and financial stocks have been roiled by the global credit crisis. Many income investors who thought they had rock-solid portfolios find themselves looking at double-digit losses. Could it be that many income investors put too much faith in too few stock market sectors? Should income investors rethink their portfolios?

Maybe so. The problem with putting most of your nest egg in a few baskets — even high-yielding baskets — is that you become vulnerable to calamities that hit your particular corner of the marketplace. That’s why most experts suggest investors broaden their investments beyond just a few sectors. Diversification helps even out the ups and downs of individual industries. “Taking a broader approach is a strategy some income investors should consider,” says Eric Kirzner, finance professor at the University of Toronto’s Rotman School of Management. “The principle of diversification applies no matter what kind of investor you are.”

The first step in diversifying your portfolio is to make sure you own both fixed-income investments, such as GICs and bonds, as well as stocks. The second step is to diversify your stock investments among countries, sectors, and investing styles. This allows you to participate in sectors such as technology that usually don’t pay dividends. It also insulates you from difficulties in any one sector — such as the recent carnage among bank stocks.

Years ago, it took a lot of planning to achieve a diversified stock portfolio. These days, it’s a snap. You simply have to purchase broad-based index funds and exchange-traded-funds, such as those that track Canada’s S&P/TSX composite index, the U.S.’s S&P 500 index, and the international MSCI EAFE index. These market-tracking investments give you a tiny stake in hundreds of stocks.

Diversification does raise a big question, though. If you’re investing in stocks that don’t pay dividends or distributions, how do you generate the cash flow you need to live on? It’s easy with traditional income investments because they’re designed to generate income. For non-dividend paying stocks, it’s not so obvious. You have to sell them to get cash. And who wants the hassle and added transaction costs of looking for stocks to sell every month to pay the bills? Fortunately, there are easy approaches to getting cash flow from non-dividend paying stocks. Here are three:

The cash cushion. If you’re an income investor who wants to sell long-term investments only infrequently (say, once a year), this is a good approach for you.

You keep at least a year of cash in a readily accessible high-interest savings account or money market fund. You use this cash to cover your expenses between portfolio reviews. As a result, you’re never forced to sell stocks under duress or when the market is down.

Dan Hallett, president of Dan Hallett & Associates Inc. of Windsor, recommends his income-investor clients maintain a cash cushion of one to two years’ income. He says the cash cushion helps them feel insulated from concerns over the market’s ups and downs — even if the market plunges, the client knows he or she doesn’t have to sell stocks immediately to meet day-to-day needs, so he or she can wait for prices to recover.

To make a cash-cushion approach work, it helps to set long-term targets on how you want to allocate your nest egg among stocks, bonds, etc. When you sit down with your portfolio once a year, look at investments that have done relatively well and draw your money from those winners.

Let’s say your goal is to maintain a portfolio of half bonds and half stocks. If bonds have increased in price during the year while stocks have fallen, you would raise cash by selling bonds. This system of cashing in your winners will eventually bring the overall value of your bond investments down until their value is again equal to that of stocks.

The money machine. If you’re an income investor who wants to make monthly withdrawals from your mutual funds, a systematic withdrawal plan (SWP) can put your investing on cruise control.

You set up an SWP through your broker or mutual fund provider. You start by designating the funds from which you will be withdrawing money. Then you choose the monthly amount to withdraw.

Once the SWP is in action, your broker or mutual fund provider is responsible for cashing in enough units of the funds you’ve designated to provide you with your chosen amount. The broker or provider then transfers this amount to your bank account. Every month, the process repeats. You don’t have to do anything.

SWP plans are flexible. You can usually change how much you withdraw by contacting your broker or fund provider. But the SWP approach works best if you are content to average your selling price by withdrawing the same amount each month regardless of market conditions. Some people may not want to do this, because they want to preserve capital by cutting back on withdrawals during market downturns. Also, an SWP doesn’t help you rebalance to maintain a set allocation between different types of investments.

T for the taxman. If you’re a long-term income investor in a high tax bracket who requires regular cash flow from a non-registered account, you may want to consider T-series mutual funds.

T-series funds are offered by several mutual fund companies. They’re set up as separate versions of popular funds and are designed to provide a set distribution to unit holders. The distribution typically ranges from 4% to 8% a year, depending on the fund. You can identify a T-series fund because it will have “T” or “T-series” in its name, along with its target distribution: “T6” and “T8”, for instance, would refer to T-series funds with target distributions of 6% and 8%.

You can think of a T-series fund as being like an SWP — but with an added tax wrinkle. The tax advantage comes if your investment in the fund accumulates substantial unrealized capital gains from stocks within the fund that have gained in value, but not been sold.

To understand why this is important, consider what happens when you redeem units in a regular mutual fund. By doing so, you transform unrealized capital gains into realized capital gains. That makes that portion of the money you receive taxable.In contrast, T-series mutual funds are structured to provide your payments largely as a return of capital rather than as a sale or redemption. Nothing is redeemed so unrealized capital gains are undisturbed from a tax perspective.

T-series funds still cause you to pay tax on income within the fund from realized capital gains, dividends, interest, and other income, just like regular mutual funds. So don’t think you can avoid receiving those unwelcome T3s and T5s at tax time. But T-series funds can postpone the additional tax hit on unrealized capital gains.

T-series funds work best in a rising market, where you tend to accumulate unrealized capital gains, rather than in a flat or falling market, where you don’t. Be aware, though, that T-series funds only defer tax, they do not eliminate it. The “return of capital” payments you receive reduce your cost base. Eventually, you sell your holdings, your cost base reaches zero, or you die. In any of these cases, you or your estate will have to pay taxes on previously unrealized gains.

Investing in a T-series fund makes most sense if you plan to stick with your investment for the long term (the tax deferral only lasts while you don’t redeem), you’re in a relatively high tax bracket (so the fund gives you a good tax bang for your buck), you’re taking the distribution strictly as a cash payment (T-series funds are pointless if you re-invest the dividends back into the fund), and the fund you’ve selected makes sense as an investment on its own merits (the tax angle won’t turn a bad investment into a good one). Also, higher distributions at the 6% or 8% level can quickly bring down the overall value of your holdings in a weak market. Go for a lower distribution level such as 4% if you want to improve the odds of the payout being sustainable over a long retirement.