Financial planners typically recommend retirees replace around 70% to 80% of their preretirement income. But as your retirement date ticks closer and you contemplate where that money will come from, that recommendation may be nerve-racking.
Most likely, you're planning to fund your golden years through a combination of Social Security and withdrawals from retirement accounts, like your 401(k) or individual retirement account (IRA). But what happens if these funding sources still leave you with a shortfall?
Here are five sources of retirement income you may not have considered.
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1. A reverse mortgage
If you own your home outright or have significant equity, a reverse mortgage is an option. It's basically a loan that works backward, where the bank pays you. You get to stay in your home, so long as you keep up with property taxes and other home-related expenses. Though interest accrues each month, the loan isn't due until you die, sell the home, or move out permanently.
A reverse mortgage probably isn't a good idea if you're determined that your home remain in your family, as your heirs will have to pay off the balance when you die. For most heirs, that means selling the residence. But if you're a homeowner in need of extra cash in retirement, a reverse mortgage is worth considering.
2. Your life insurance policy
With permanent life insurance, such as whole life coverage, the policy includes both a death benefit and cash value that accumulates over time. You can withdraw the cash value tax-free in most cases, so long as you don't withdraw more than you paid in, though you'll reduce the value of your death benefit. But if your children are grown and no one is financially dependent on you, tapping your life insurance policy may make sense.
3. HSA funds
Unused money in a health savings account (HSA) stays with you even if you change jobs. Before you turn 65, you'll owe income taxes plus a 20% penalty if you take distributions for nonmedical purposes. But once you're 65, you can withdraw the money penalty-free, though you'll still owe income taxes on the withdrawal.
Perhaps the smartest way to use your HSA is to keep that money for medical expenses in retirement. Fidelity estimated in 2022 that an average 65-year-old couple can expect to pay $315,000 in out-of-pocket medical expenses over the course of retirement. If you hang on to your HSA funds and use them for healthcare in retirement, you can use the money for Medicare premiums, co-pays, and other unreimbursed expenses without paying taxes or a penalty.
4. An annuity
An annuity is an insurance policy that protects you against the risk of outliving your money. You put down a substantial lump sum of cash in exchange for guaranteed lifetime income.
These contracts often get a bad rap because they're extraordinarily complex and heavy on fees. But an annuity is worth exploring in some cases, particularly if you're in great health and there's a history of longevity in your family. They make the most sense for someone who's relatively risk-averse and prefers the security of steady income over investments with higher growth potential.
5. Working part time
The idea of working in retirement may seem contradictory. But 2022 research from the Transamerica Center for Retirement Studies found that 57% of workers plan to work either part time or full time in retirement.
Many older Americans aren't able to work for various reasons, such as health problems or caregiving duties. But if you're able to work some, either through a part-time job or a side gig, like ride-share driving or renting out an extra room in your house, the extra income could help you limit withdrawals from your retirement accounts and could also help you delay Social Security. With the surge in remote work opportunities, you may have plenty of options that are compatible with the lifestyle you envision for your retirement.
