Consistent income in Retirement
You've made it decades building your skills, working long hours, saving, paying down debts, and now you're ready to retire! This will be an exciting and also confusing time in your life. You go from working consistent hours, always having a task to handle, and consistent reliable income, to all the free time in the world, and questions about how the bills will get paid from your savings.
Back in the day, retirees would receive social security income, and a nice sized pension to cover the monthly bills! This is very rare nowadays, and most clients retiring will need to establish a plan to provide income from their retirement savings. Here's a breakdown of the common income streams investors can have in retirement.
Retirees can receive social security income as early as age 62. They can also choose to extend when they will receive these payments until later in life for a higher monthly payment. This decision will come down to the individual and how much income is needed at that time, life expectancy, and other factors. While social security income is a great resource for retirees, it shouldn't be the sole source of income as inflation makes a big impact on this overtime.
If you are one of the lucky few that receives a pension from your employer in retirement, you'll have various income options to select from. Each plan is different, but some common options include 100% of the income to you for the rest of your life, split between yourself and your spouse, or a lump sum rollover to take the full amount of your assets and transfer them to your own retirement account. Pensions can be a great source of retirement income as many are structured to pay out for the rest of your life.
Annuities are financial products offered by insurance companies that provide guaranteed income streams for clients. There are countless variations of these plans that can be invested in the market, guaranteed and backed by the insurance carrier, hedges on the downside from market risk, and more. Annuities have gotten a bad rep in the past, but if structured correctly they can be an excellent source of guaranteed income to fill any gaps you may have with your monthly expense budgets.
Interest income is paid from investing in debt securities. Think of it like you are the bank in this scenario. Instead of taking out a loan to buy a car or house, you give out the loans! You can lend money on real estate, businesses, to government entities, and more. This is known as bonds, notes, or bills. Depending on the security, you will receive either monthly, semi annual, or annual income for these investments. The principal balance can fluctuate up and down like stocks, but the goal is to generate income in retirement.
Dividends are the profits that corporations agree to pay out to shareholders from the operations of the company. These are commonly distributed quarterly, but can be annually, or however they choose. Your dividends, or portion of the profits are based off your % ownership in the company. The more shares you own, the higher your payout will be. These are not guaranteed, and can fluctuate as a business will never know exactly what profits they will or won't have in the future. In addition to hopefully increasing stock prices overtime, dividends are a great form of income for retirees to rely on.
Some retirees may have a portfolio of rental properties as well to supplement their retirement income. This will require active management to maintain the properties, tenants, pay the operating costs, and collect the rents. The rental income should be generated monthly, and if there are profits left over after paying all the bills, this can be a great income stream for retirees. If the properties are paid off at this time, the net income that reaches your bank account will be even higher.
So which is best for you? Pensions will be determined by your employer so you don't have much say in the matter. Social security income will be based off your age and when you elect to turn the income stream on. After this, the rest is based off your retirement assets, what investments you understand, and what makes the most sense for your plans. You'll have to decide if guarantees are important to you, having access to the funds, taking on more risk, and many tax questions in the process.
This list should be a helpful start to at least begin brainstorming which option may be useful for a portion of your retirement savings overtime. Need a financial advisor to help with your retirement planning? Book a call here
***Investing requires risk and loss of capital, this is not a solicitation of securities and purely for educational purposes."
"The question isn't at what age I want to retire, it's at what income."