Best Sources of Retirement Income

Ben Allen  | 

How do you plan on financing your retirement? Stuffing spare change under your mattress isn’t going to be enough to pay for your golden years, especially if you are looking to last the average 18 years of retirement.

Having the right (and multiple) sources of income when you’re retired can help make sure you have enough money to last the rest of your life and be able to live comfortably. The cost of living is consistently rising, meaning social security likely won’t be enough to cover you when it’s your turn to retire.

In order to have enough money, you’ll need to invest in other forms of income and plan on how to best utilize each source of income when you do retire. If you aren’t saving money for retirement, start immediately. Failing to do this could lead to having to leave retirement to return to the workforce, retiring later in life, or making sacrifices to make ends meet.

Average Retirement Income

The average american retiree’s income is $32,000 a year. That’s equals living off of $2,666 a month, which is not always an easy feat to do. Their income is most commonly a combination of money from social security and personal savings/investment and company funded pensions.

That average is only for those currently retired. The average retirement income will need to increase as cost of living rises, meaning that future generations will need to save more money now.

While living on a limited income with $2,000 to $3,000 a month may seem impossible, it’s quite reasonable for many retirees. One major expense usually missing for older people is large debts, including mortgages and car loans. This frees up money to go towards other expenses, like paying for medical bills and household costs.

A big factor in knowing if you have enough saved up is where you plan on retiring. Having $32,000 a year won’t be nearly enough if you live in New York City, but could cover costs of living in a smaller town or suburb.

Best Sources of Retirement Income: Investing for Retirement

The ways to save for retirement are varied, each with their own set of benefits for retirees. Picking the right ones for your life and income can have huge impacts on when you can retire, what kind of lifestyle you can enjoy, and when you’ll need to pay taxes on the money you put away.

IRAs: Roth and Traditional IRA

Individual retirement accounts (IRA) is a tool that allows anybody to start saving for retirement. You set up an IRA with a brokerage firm or similar financial institution.

When you make contributions to an IRA, it isn’t like putting money into a savings account. The money placed into an IRA is held until you have enough money to purchase an investment such as stocks, bonds, and mutual funds. Then, the money earned from those investments is put back into the fund to purchase further investments to make more money again.

When it comes to IRAs, there are two different forms, Roth and Traditional. With a traditional IRA, the money you contribute to it is treated as “pre-tax” during that year. In other words, you don’t pay taxes on the money you save, and it doesn’t count toward your total income for the year, potentially lowering your tax bracket and overall tax bill. This means you get a tax break now, but will have to pay taxes on the money when it’s pulled out in retirement. However much you withdraw from the account in a year is treated as income for that year, and subject to income taxes. This is a good choice to make if you think you are currently in a higher tax bracket than you will be in when you retire.

A Roth IRA is the flipped version, where you make your contributions after taxes, so everything you save has already been paid for. When you pull the money out at retirement, you don’t have to pay further income taxes on it — even if it has appreciated over the years beyond the amount you personally saved. This choice is better if you think you will be in a higher tax bracket when you retire then you are currently in.

401(k) Accounts

A 401(k) is a benefit employers can give their employees where workers can contribute directly into a retirement account from their paycheck and they employer will also contribute to it. Often, employers offering 401(k) plans will match employee contributions up to a specific paycheck percentage. This is the main difference between an IRA and a 401(k): IRAs are usually self-funded by individuals, while 401(k) accounts are sponsored by employers. The employer match isn’t a universal feature of 401(k) accounts, but it is pretty common, and obviously wouldn’t be available if you chose to self-fund an IRA.

With a 401(k), it’s possible to pull the money out a paycheck before income taxes are calculated or paid, meaning that you get more money into the account. You can also put money into a Roth 401(k), meaning you can pay taxes now on the money, but the money that grows in the account is tax free.

Pensions

A pension is a retirement benefit where an employer puts money into a pension plan while the employee works for them. Then, when they reach retirement age, the employee receives a monthly check or a lump-sum payment from the company. The amount given in this check varies for many reasons, including how long you worked for them, how much you earned, and your age.

Pensions are most common in government organizations, but some larger corporations utilize them too. Typically, when receiving income from a pension, it is considered taxable income.

Annuities

An annuity is a type of product that can be purchased to help supplement income for retirement. Basically, you pay a large chunk of cash now to make an investment, and then at a later date, it’s paid back. You can choose to have this payment come in monthly, quarterly, yearly, or in one lump payment. Annuities can function as a self-funded pension for workers who either don’t qualify or a pension or whose employer does not offer one.

This can allow you to defer paying taxes on the money for a long period time, which is useful if you are currently in a high tax bracket. One complication with an annuities is that it’s designed to sit for a long time. Most annuities will charge a percentage if you pull the money out before five to ten years have passed.

Real Estate: Investment Properties and Home Equity

Investing in real estate is another way to get a retirement income for the future. This could include buying homes and apartments to rent out, buying land or homes to later sell for profit, or even using your own home’s equity. These sources can provide supplemental income for retirement.

Nearly all retirees own a home. Many of those that own a home, have zero debt on it because they prioritized paying off their mortgages before retirement. That makes the home a powerful investment, one that can be used in retirement. This can include selling the home and downsizing while pocketing the profit, renting out the home or a spare bedroom, getting a reverse mortgage, or borrowing against the home’s equity.

The other side of the coin — still trying to pay off a mortgage in retirement — can be challenging, and is a sure way to burn through your retirement savings. In making your retirement plan and considering your options, it will be important to figure out what it will take to eliminate your mortgage payment before you quit working. This gives you a little bit of a safety cushion of equity as well as cutting a major expense out of your budget and stretching your savings.

Social Security and Public Benefits

One form of income all retirees 65 years or older receive in social security. While not enough for most people to live off of, for many, it makes up about half of their income.

Another useful benefit is Medicare, low cost health insurance for the elderly and retired. Retirees often have massive health care bills and larger insurance costs, but medicare can do a lot to help.

Part Time Work and Retirement Careers

For some, the stereotypical retirement life isn’t for them. Even though they’ve finished working full time at their career doesn’t mean they are ready to stop working. For others, because of life events and barriers, they weren’t able to save enough to fully cover their retirement, requiring them to go back to work.

There are a whole host of jobs for retirees, ranging from making money doing their hobbies to getting a small part time job at the local grocery store.

Plan out all of the different ways to finance your retirement. Life is going to happen, you’re going to move into different tax brackets, you’ll lose jobs and get promotions, so revisit your retirement plan often. If one source of income will work out better in the long run, shift your plan to that. Make sure you are on track to retire when you want to and will have the means to financially care for yourself when you do.


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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.

This post was updated August 28, 2018. It was originally published April 2, 2018.