Not so long ago, most Americans looked forward to pension income in retirement, along with Social Security. Today, relatively few U.S. workers have pension plans available at work, and many are not taking full advantage of retirement savings plans such as 401(k)s. This paints a worrisome picture. Americans increasingly have to rely on themselves to prepare a comfortable retirement, and many of us need to build multiple income streams.
Fortunately, there are many income streams that can be established to support us in our golden years, though some of them require us to act soon. Here's a rundown of several potential income sources you can set up for yourself to help you afford the lifestyle you want.
1. Social Security
For better or worse, Social Security is what most Americans are counting on for much or most of their retirement income. That's not good, given that the average benefit for retired workers is $1,294 per month, or about $15,500 per year. For most people, that won't support much of a retirement. Living off even twice that income would be a challenge for many of us. Still, the Social Security Administration notes, "Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income." Opinions vary on when to start collecting Social Security for maximum gain: You can increase your monthly benefit by waiting past full retirement age to collect it (the benefit rises by about 8% annually until age 70), but by starting to collect a lower benefit earlier, you'll be receiving income for a longer period. You can inform your decision by using the SSA's benefit calculator to estimate what your payout will be, depending on how much you make and when you retire.
Another way to have more income in retirement is to keep working a few years longer. That's not an appealing option for many people, but if you have few other choices, it can be a powerful one. Further, many find retirement a bit boring once the novelty wears off. Even delaying your retirement for just a few years can really boost your retirement nest egg while also postponing your withdrawals, which will slowly deplete it. In addition, you'll likely get to continue enjoying your employer-provided health insurance and perhaps receive more matching funds from your employer for your 401(k).
As an example of how powerful just three more years of work can be, imagine you've accumulated $250,000 for retirement. If you keep working and allowing your savings to grow, and it earns an annual average of 8%, it will become $315,000, delivering an additional return of $65,000.
If you have some stock, bonds, and/or other investments, they can support you in your golden years. (They may be in the form of IRAs or 401(k) accounts from your workplace, or separate investment accounts held at financial-services companies.) For example, a $250,000 portfolio of stocks with an average dividend yield of 4% (or bonds with an average interest rate of 4%) will generate $10,000 per year. If you mostly own non-dividend-paying investments, you can always sell off a bit of your portfolio each year, ideally allowing the remaining assets to grow over the years. Note that if you have a traditional IRA (as opposed to a Roth) or a 401(k), you'll likely have to start taking required minimum distributions beginning when you turn 70-1/2.
Most of us are out of luck if we want pension income, but we can approximate one via an immediate annuity. With an immediate annuity, you fork over a hefty sum, and in return, you get regular payments for the rest of your life. They can even be indexed to inflation, for a price. There are downsides, such as giving up any growth prospects for that big sum of money (and being unable to leave it to your heirs), but guaranteed income for the rest of your life is hard to beat. Read up on them before buying, though, as there are some important details. For example, their payout is tied to interest rates, so if you can delay buying one until the prevailing low rates rise some, you'll be better off. You'll also get more per month in payouts if you're older, rather than younger, when you buy. Think twice about variable and equity-index annuities, as they can be quite problematic, often featuring high fees and lower returns than you can get elsewhere.
5. Reverse mortgages
Another option, for some people in some circumstances, is a reverse mortgage. With a reverse mortgage, you essentially receive the equity value of your home in the form of a loan, converting your equity into debt. There are some major downsides to them such as their cost, but there are upsides, too. Typically, the loan doesn't have to be paid back (often by selling the home) until you die or move. Read up on these instruments, too, before getting one, as you might have better, less costly alternatives.
Your retirement will likely require several income streams. Give some thought to where your money will come from in retirement and whether it will be enough. It's not too late to improve your retirement.