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4 Surprising Sources of Retirement Income

By Ryan Downie - Feb 3, 2021 at 7:21AM

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Consider these four uncommon sources of retirement income if Social Security, 401(k), and pensions can't meet your needs.

It's scary to stop earning income when you stop working, but everyone dreams of a comfortable retirement, so it's a bridge you'll have to cross eventually. Popular sources of retirement income, such as Social Security and retirement accounts, might be enough to cover bills for most investors, but there are several alternative cash flow opportunities that are often overlooked or underused. These four surprising sources of retirement income are less common for good reasons, but they might be worth considering if you've already exhausted the traditional ways to enhance your retirement lifestyle.

Usual sources of retirement income may not be enough

Most Americans are entitled to Social Security benefits. The amount received under this program varies with age, lifetime contributions, and the year you start taking payments, but the average retiree is paid over $18,000 annually. Defined benefit plans, such as pensions, are also common for many professions. These pay a guaranteed monthly income for life, but they have become less popular in recent times as they've become harder to manage.

401(k), IRAs, and other qualified retirement accounts were introduced by the IRS to fill the gap left by dwindling pension participation. These encourage investment to build retirement savings, and roughly 75% of working people have some sort of retirement account. Along with investments in regular brokerage accounts, these assets can produce investment income and act as a source of funds in retirement. Additionally, many people have elected to move assets into annuity contracts, in which an insurance company agrees to pay the account holder each month for either a specified number of years or the lifetime of the holder.

Retirement aged man metalworking

Image source: Getty Images.

Unfortunately, not everyone can qualify for the most common retirement income streams. Even if you are eligible, it may not be enough to cover bills, pay for higher medical costs, keep up with inflation, or provide the desired lifestyle for your family. If you can't meet your needs through the traditional channels, you might need to get creative.

1. Equity in your home

Real estate is the largest asset class for most retirees, according to U.S. census data. You may have a few hundred thousand dollars of equity in your house, but it's unfortunately not liquid and available to pay for things. This problem was addressed by the development of reverse mortgages and other financial products, which transform home equity into cash while allowing someone to remain in their home.

This sounds like a great deal at face value, but there are some risks and downsides that need to be considered. Reverse mortgages require the payment of fees and a rising embedded interest cost as the loan grows, and they don't change the liability of bills such as property tax or insurance. These products also necessarily deplete your assets by turning them into cash for consumption, so it will whittle down your net worth over time. You must weigh the costs, risks, and benefits before you make a decision on a reverse mortgage.

2. Peer-to-peer lending

Peer-to-peer lending (P2P) services connect individual lenders with individual borrowers to facilitate private loans. P2P platforms allow lenders to set standards for borrowers, match counterparties with agreeable terms, then distribute funds and manage repayment transfers. Some of the more reputable lending platforms are backed by major financial institutions and now have sizable positive track records. However, consumer loans are often riskier and less liquid than most retirement bond portfolios, and P2P lenders don't enjoy the same regulatory oversight as corporate bondholders. Still, it's an alternative that can produce higher yields than traditional debt products.

3. Private REITs

Many people enjoy income streams from publicly traded REITs, but fewer have taken advantage of private REITs, which have traditionally required large minimum investments. Advances in financial technology and crowdsourcing have also lowered the barrier to entry, allowing individuals to participate with as little as a few hundred dollars in some cases. Finding the right private REIT that's focused on producing income can yield great results, but again, different regulatory standards, reduced liquidity, and higher risk could be issues to consider. Most private REITs have relatively high fees that cut into returns, so make sure that any additional expenses you incur are justified by higher performance. Private REITs are also generally less liquid than their publicly traded counterparts, meaning it may take a lot of time to get your money back once you've invested. These factors all vary from platform to platform, so do your research to make sure it's a good fit for your financial goals and risk tolerance.

4. Silent partnership in a small business

Some people are excited by opportunities to become silent partners in small businesses. If things go well, your capital will enable the growth and stability of a profitable business that will eventually start producing regular distributions from those profits. That's a fine narrative when it works, and it can be very fruitful for the right people. However, small businesses fail much more frequently than stocks, and it's one of the least liquid investments. Roughly 20% of small businesses cease operations before completing their first year, and 50% more are out of business within five years. Once your capital goes into a silent partnership, it may never come back out. Even in the best-case scenario, it will take several years to have your initial investment returned. If you do become a silent partner, make sure you trust the people managing the company, only invest in strong business models, and only part with capital you can afford to live without.

These surprising sources of retirement income fly under the radar because they aren't as efficient or risk-appropriate for most investors. Stocks, bonds, pensions, and Social Security just make more sense. Still, if you're finding that the more common solutions are insufficient, these uncommon plays might be worth exploring.

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