One of the toughest parts of retirement is the fact that your bills don't go away even though your salary does. You need some source of money to cover your costs, and as 2022 so brutally reminded us, stocks don't always go up. It's important to have ways to generate that cash that don't rely on selling your stocks to have the money you need to live your life.
With that in mind, these five ways to generate income in retirement without going back to work can help you do just that. Of course, you don't have to just rely on one strategy, especially since they all have trade-offs attached. It's a good idea to mix and match among them, to maximize your chances of having the cash you need to live a comfortable retirement.
Image source: Getty Images.
1. Delay your Social Security
You can choose to take your Social Security retirement benefits at any time once you reach age 62. Between ages 62 and 70, the longer you wait to start, the higher your benefit will be. For those born in 1960 or later, starting at age 62 lowers your benefit by 30% from what you'd get by claiming at your "full retirement age" of 67. Likewise, starting at age 70 increases your benefit by 24% versus claiming at full retirement age.
In other words, if your "full retirement age" benefit is $1,000 per month, your actual benefit could be anywhere between $700 and $1,240 per month, depending on when you claim. That's a huge swing in what's likely to be a substantial source of inflation-adjusted income in retirement.
The longer you wait within that age window of 62 to 70, the higher your benefit -- and the dollar amount of any inflation adjustment on it -- will be. The trade-off, of course, is that you collect $0 for each month you wait to start your benefit, so you'll need another source of money to cover your costs until you do get Social Security.
2. Become a landlord
Owning real estate is a time-tested way to earn some money without having a formal job. Especially since depreciation can shield some of your cash flow from being immediately taxed, real estate investing can be a way to efficiently generate income in retirement.
Despite that potential, being a landlord can become something of a job unto itself. You're responsible for repairs and maintenance on your properties, and you may need to take an active role in collecting rent. You also have to cover the mortgage and property taxes whether the place is rented or not, and you'll likely be responsible for at least some core utility bills if the place is empty.
On top of that, you will often need a larger down payment and pay higher interest rates on a rental property than you would on an owner-occupied home. That could lead to higher cash requirements and fixed costs than you otherwise might have anticipated. As a result of all those trade-offs, while there is cash flow to be generated from real estate, it's not as simple as it may seem on the surface.
3. Buy dividend growth stocks
It was through the power of rising dividends that my own investment income was able to outpace substantial inflation in 2022. Stocks that pay dividends (and regularly increase them) can potentially be a tremendous source of income for retirees, but of course, there are risks and trade-offs attached.
For instance, one of the biggest risks is that dividends are not guaranteed payments. If a company gets into serious trouble, it may cut its dividend to free up cash that might help it recover. Another trade-off is that while dividends may grow over time, they're rarely huge sources of current income. The current dividend yield on the S&P 500 is around 1.7%. As a result, you'd need a pretty big nest egg invested this way to have a decent shot of fully covering your retirement costs.
4. Own bonds
As of this writing, the highest-yielding normal U.S. Treasury debt pays investors at a 4.8% annualized rate. That means investors can earn as much as $48 of annualized interest for every $1,000 invested that way. Despite the political theater over the debt ceiling, U.S. Treasury debt is considered a safe investment. After all, the U.S. Government has the power to print the very dollars it needs to pay that debt, making inflation from over-printing currency a bigger risk than straight-up default.
There are downsides, though. For one, there's the concept of reinvestment risk. That 4.8% yield is currently available on six-month bonds. But when those bonds mature, you'll have to reinvest your principal elsewhere to earn interest, and there's no guarantee that new bonds will pay at that rate. For another, most bonds pay constant interest throughout their duration, which means their payments don't generally keep up with inflation over time.
5. Write covered calls
If you own at least 100 shares of a company's stock, you can typically take part in an options strategy known as writing covered calls against that stock. Basically, you offer someone else the ability to buy that stock from you on or before a certain date at a certain price (the "strike price"). In exchange, you get paid a bit of cash up front for writing the contract. In addition, you get to keep the shares, unless or until the person on the other side of that contract exercises it and buys the shares from you.
It's a tempting strategy, but it still comes with risks attached. First, if the stock goes up before expiration, your gains are capped at the contract price, because that's the price you agreed to sell your shares for. On the flip side, if the stock goes down, you do get to keep the shares, but you'd likely have to sell your next round of covered calls at a lower strike price to receive the same income. That would mean either capping your participation in any recovery, or forgoing the next round of covered-call income.
Mix and match for your best retirement income
While all five of these approaches can help you generate income in retirement without going back to work, they all have trade-offs attached. As a result, your best approach may be a combination of several or all of them.
No matter which path you choose, you'll want to get your plan in place well before you retire, to give yourself the best chance of having a sufficient nest egg to support yourself. The sooner you begin, the more time you'll have on your side. So start today, and put yourself on a path to maximize your chances of a larger retirement income.
