There is good news and bad news when it comes to finding income to fund your retirement. The good news is that you have a lot of options available. Perhaps more options than ever before.
The bad news is that most options come with risks and drawbacks. If you want to know how other people fund their retirement, these are the most common sources of income.
How’s this for an employment perk? Work for a company for a long time and they pay a percentage of your income to you for the rest of your life. Pensions are still a great deal if you can find an employer that offers one. Although, relying on pension funding is very risky.
If your pension is funded by a business, the future of your pension is dependent on the success of that company. It used to be that most retirees lived off a pension, but today it is almost nonexistent. Most companies have either failed or cannot afford the financial burden of sustaining retirees. However, pensions for government employees are still common and relatively safe.
For every paycheck that you earn, money is taken out for social security. Everyone who pays into the fund for a period of ten years is entitled to receive monthly benefits starting at age 62. Your benefits are based on a moving average of the income you earned throughout your tenure. Generally speaking, benefits are increased to match inflation each year.
Despite frequent talk about ending social security, the program is very popular and much more stable than Medicare. There is no guarantee against acts of congress, but social security is likely to continue for decades, even if some of the benefits change.
One of the most common sources of wealth for seniors is in the equity of their home. Since home values tend to increase over time, you can think of principal payments in your mortgage as forced savings. Home value appreciation and you accumulated principal can be reclaimed as either a lump sum, if you sell or fixed monthly payments through a reverse mortgage.
However, claiming that wealth and turning it into income can be tricky when you retire. Selling your home takes time and while you might claim a large capital gain, switching to home renting will increase your living costs. The housing market is not always stable and you risk losing property values during recession years.
Financial Investment (Stocks and Bonds)
Thanks to numerous financial products like 401ks, IRAs and mutual funds, it’s easier than ever to buy stocks and bonds. The best part is that most of these products are diversified and offer good returns over the very long-term.
Income is earned from appreciation in stock price and ownership dividends. Over the course of the investment, these returns will pool into a massive nest egg. At retirement, you begin drawing out those earnings until you expire or run out of money.
If you’ve been in the stock market anytime in the last 5 years, you know that having a lot of retirement income in stocks and bonds can be very frustrating and even scary. You can retire one day with lots of retirement income and then lose half of it a few weeks into a major recession.
I’m sure you’ve heard this one before: “An annuity is a bad investment because you can earn more in the stock market!” However, with lots of baby boomers stuck waiting for the stock market to re-inflate their retirement accounts; I have a sneaking suspicion that annuities will make a comeback.
Annuities can be complicated because there are many different kinds. However, they are all based around a single concept. You make a large payment into the annuity and the annuity guarantees a fixed annual return. Let’s say you have a million dollar annuity with a 5% guaranteed payout. Then you’d get at least $50,000 every year.
Over the long-term, the stock market tends to do better than the 4 or 5% return from annuities. However, annuities offer predictability. It does you no good to have a large nest egg if you are waiting for the market to turn before you cash out.
Given the lagging of middleclass wages, nonexistent pensions and the dramatic fluctuations in the stock market, I expect to see more people turning to entrepreneurial ventures as a source of retirement income.
Real estate rental is a common venture for this type of strategy. You can be as involved or absent as you want so long as you don’t mind paying property managers and have enough to buy a property. In exchange, you can take advantage of property appreciation and rent revenues.
Any side business can help you achieve your goals, and thanks to e-commerce it is much easier to find a market. However, you need to be cognizant to the fact that any business is a demand on your time. It’s not hard to overextend yourself if you also work a day job.
There are many options for finding retirement income. The important thing is to identify sources that you believe will meet your goals, and position your finances to take advantage of them. For example, I met someone who worked out three different government pensions (military pension, law enforcement pension and a teacher pension). That was his strategy and he now has a very comfortable retirement. Sadly, few workers ever stop and consider all the possibilities and are left with insufficient income to fund the lifestyle they want. It doesn’t have to be that way.
What sources of retirement income are you taking advantage of?