If you’ve run a marathon (and even if you haven’t), you know how challenging it is and how much effort it takes. You have to commit to strenuous, hard work in order to achieve your goal of crossing the finish line. There’s discipline and strategy involved. Then there’s the emotional aspect: Have I trained hard enough? Have I the energy to get through the race? What will I do if I can’t finish?
These characteristics are why many people like to describe retirement as a marathon rather than a sprint. It takes a lot to reach the goal of financial independence.
But it’s more apt to consider retirement a triathlon. That’s because you should expect to use several means to generate the income you need to live a comfortable retirement and not run out of money.
People get retirement income from a variety of sources: retirement savings accounts, Social Security, your home, rental properties, etc. A 2015 Gallup poll found which 10 income sources are most often considered major sources by workers and retirees.
In addition to knowing how much you need in retirement, it’s just as important to understand where the money will come from. So here are 10 ways you can receive income in retirement:
- Retirement savings accounts: Most workers (49%) plan to rely on retirement savings accounts, such as 401(k)s and IRAs. Retirement accounts were also the third most common source of income for retirees (25%). This emphasizes the importance of saving as much as possible during your working years. Additionally, it’s important to get professional guidance to appropriately invest and manage your assets for your specific financial goals.
- Social Security: Although some think Social Security will end, it will likely remain a major income source for you in retirement. In fact, Social Security is consistently the top source for retirees (59%). Therefore, it should still be a major part of your retirement planning process. Remember, when you claim affects the size of your benefit. A permanent reduction is applied if you claim at the earliest age, 62. You receive a credit if you delay until age 70. However, the goal should be to maximize all of your sources together, which means the right age to claim depends on your personal situation.
- Other savings accounts or CDs: Over a quarter of workers (27%) expect their retirement money to be held in savings accounts. Meanwhile, only 8% of retirees say they are a major income source. In periods of low interest rates, savings accounts and CDs may not provide enough growth to beat inflation, making them a risky place to put a significant portion of your retirement money. Instead, consider using these financial vehicles for short-term financial goals or for building an emergency fund.
- Work-sponsored pension: The trend toward fewer and fewer offered pension plans is reflected in the large portion of workers (40%) who say a pension will not be a source of retirement income. If you’re fortunate to receive a pension, carefully consider the pros and cons between taking a lump sum and monthly payments. You may want to seek the professional help of an adviser to determine which option is best for you. Also, be mindful that pensions can be cut, even when you are retired.
- Part-time work: Workers and retirees are at odds when it comes to part-time work. Only 3% of retirees claim part-time work is a major source of income. But 21% of workers plan to keep working in retirement. Perhaps, this is because each generation defines retirement differently. Many future retirees plan to use retirement to pursue new interests. Of those who plan to work in retirement, 44% will search for a job in a new field of interest, according to an AARP study.
- Home equity: Your home may be your most valuable asset. Over a fifth of workers (21%) say the equity they have in their homes will be a major income source. Downsizing can provide a financial windfall to boost your retirement. It also makes sense as you need less space or a home more suitable to your retirement lifestyle. A reverse mortgage is another option, but be aware of the complexity and potential risks involved.
- Individual stock or stock mutual funds: Although 20% of workers believe individual stocks and funds will be a major source of income, don’t plan on it. Consider that 58% of retirees say they are not a source of income. Trying to bet on individual securities or to time the market is very difficult and comes with a lot of risk.
- Money from inheritance: When it comes to retirement, you should focus on what you can control, such as investment costs and your behavior, instead of the generosity of a dead, rich uncle. And most people do, as very few workers and retirees consider inheritance to be a major source of retirement income. If, however, you know with certainty that you are bequeathed money, don’t spend it before you actually get it.
- Annuities or insurance plans: Insurance products such as annuities are one option for creating another guaranteed income stream like Social Security or a pension. However, they are not for everyone. They can be expensive and illiquid and have large penalties.
- Rent and royalties: These are known as passive income sources. They require little effort in exchange for money on a regular basis. For example, renting out a vacation home throughout the year. Although they do not rank highly for either workers or current retirees, the advent of the “sharing economy” may change that for future retirees.
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Speak with an Advance Capital adviser who can help create a financial plan – no cost, no obligation – that details your potential retirement income sources. Fill out the contact form here or call 800-345-4783.