Retirement can feel both exciting and overwhelming at the same time. The idea of getting to stop work is very appealing. But, the thought of living off of just social security and pension payouts can be frightening. However, you can feel much more secure in your retirement if you plan ahead and find additional retirement income streams. Keep reading for creative and easy ideas to diversify your income in retirement.
How Much Do You Need in Retirement?
First, it’s helpful to understand how much you actually need to live a comfortable lifestyle in retirement.
Generally speaking, the rule is to aim for 80% of your current income during retirement. So, if you make $100,000 annually currently, you’d need $80,000 each year in retirement.
Unfortunately, social security and pensions don’t bring most people close to this 80% goal. And most Americans simply don’t have enough savings to supplement their retirement. According to a 2023 retirement report by Fidelity, the average American only has 78% of what they need for retirement saved.
This leaves retirees in less-than-ideal situations where they need to work a part-time job, work longer than they initially planned, go into debt, or even sell their homes.
5 Retirement Income Streams Beyond Social Security and Pensions
Luckily, you’ve thought ahead and are prepared to take action, so retirement is as picturesque as possible. You’ve come to the right place for ideas. Here are some additional retirement income streams you can consider taking advantage of:
1. 401(k) Plans
A 401(k) plan, one of the most common retirement options, is a tax-advantaged retirement account some employers offer. Often, employers incentivize employees by offering to match (up to a certain amount) any annual contributions made into the account. If you have not started a 401(k) plan yet, know that it’s not too late to do so. Start one today and start contributing. If you have an employer match, try to take full advantage of it and max it out every year until your retirement.
In 2023, the average employee contributed 8% of their salary to a 401(k) account.
Your 401(k) plan is a retirement account and allows you to make deposits without taking out any income tax. However, the money is difficult to get out before retirement. Unless you meet specific qualifications, you’ll pay a 10% fee for any withdrawals before you’re 59.5 years of age. This works as a great incentive to leave the money in the account and not touch it until retirement!
2. Roth IRAs
If your employer doesn’t offer a 401(k) plan or one with a match, you may opt to open a Roth IRA account instead. A Roth IRA is another popular individual retirement account that allows you to make post-tax contributions that can earn interest tax-free. You can withdraw the money out of a Roth IRA account, tax-free, after the age of 59.5 (as long as the account has been open for at least five years).
If a 401(k) isn’t an option for you, consider opening a Roth IRA today. Even contributing a small amount from every paycheck starting now will make a difference to your retirement.
3. Investment Portfolios
You’ve probably heard the expression, “Make your money work for you.” Sure, you can keep your money in a high-yield savings account or short-term certificates of deposit. However, the earning potential with these is much lower than the stock market.
There’s a reason every wealthy person you know talks about their investment portfolio. The stock market is a great way to watch your money grow significantly over time.
Of course, there are some risks with investing, as the stock market tends to see ups and downs. But if you keep your money in the market, there is a good chance it will grow. The average stock market return for the S&P 500 over the last 66 years has been over 10%.
And remember, investing doesn’t have to be high-risk! You can choose to invest in bonds rather than stocks with less volatility.
As your investments grow, you can deduct dividends or a small portion of capital gains while leaving yourself a balance to continue earning more.
Don’t be scared to start investing today. You don’t need to have a massive amount of experience to begin. Just start with what money you have and work with a financial professional or a Robo-advisor to start your investment account.
4. Rental Income
If you’re lucky enough to own a home, consider whether you can capitalize on it. Leading up to retirement (and into retirement), try offering up some of your home as a rental space to earn additional income. You can rent out a basement or use a spare room as an Airbnb room for travelers. This can be a great addition to your retirement income streams to give you more flexibility in your budget.
5. Annuities
If you’d like an additional guaranteed monthly income in retirement, consider purchasing an annuity. An annuity is a contract with a life insurance company where you’re paid a lump sum, typically annually, for the rest of your life. To receive an annuity, you need to pay the company an initial lump sum.
Unlike investing in the stock market, your annuity deposit will always be the same pre-agreed-upon monthly income. The amount will not change, even with changes in the market.
However, note that with an annuity, any money left over when you pass will not go to your estate.
Retirement Can Be Comfortable If You Plan Now
It’s worth taking the time to financially prepare for retirement now. By doing so, you can ensure a comfortable, secure lifestyle even when you stop working.
It’s never too late to start. Even if retirement is just around the corner for you, there are some steps you can take to give your retirement income a boost. The hardest part is getting started. Once you get your new plans off the ground, you’ll be impressed by how quickly you see your money grow!
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