Don’t Forget These Potential Sources of Retirement Income
Planning your retirement income is like putting together a puzzle with many different pieces. However, your puzzle, your uncle’s puzzle, and your neighbor’s puzzle don’t all use the same pieces and may even look entirely different!
However, no matter what the final puzzle looks like, all retirement puzzles have pieces called “potential sources of income.” Each of these pieces can provide income during retirement, so it makes good sense to look at each of them to determine which ones belong in your puzzle and what percentage of your retirement income they are likely to provide.
According to the Social Security Administration (SSA), nearly 90% of those over 65 receive Social Security benefits. This means that this is one piece of the puzzle you are likely to share with a majority of other retirees. However, the amount that Social Security will provide varies greatly between individuals and is likely to change over the years as new rules, regulations, and taxes go into effect to keep the program solvent. (To estimate your annual benefit, use this calculator found at the SSA website.)
In general, your benefit will depend on a number of factors:
- Amount you earned
- Types of earnings
- Number of years earning money
- Age you take benefits – the older you choose to take benefits, the higher the benefit amount may be
Few Americans still receive a pension provided by an employer. However, if you happen to be one of those with a pension, this will be another piece of your puzzle. Pensions are either a single annuity or a joint and survivor annuity. The single annuity ends upon the death of the pension-holder. The joint and survivor annuity continues providing benefits until the survivor’s death.
If you are married, you will have a joint and survivor annuity unless your spouse chose to give away their survivor rights. Although this makes paying into a pension cheaper, it can be costly to a newly widowed spouse who now loses a portion of their retirement income.
Hint: Consider taking the joint and survivor annuity unless the surviving spouse’s income will equal at least 75% of your current joint income. But only reject this option after doing a full evaluation of your needs and resources and even better, get a professional opinion.
You also need to be aware of the following:
- Companies can and do change their plan provisions – be sure to keep up with these changes.
- Not all pensions increase with inflation – find out how your pension plan calculates inflation increases.
- When paying into a pension plan, you may not have paid as much into Social Security, lowering your Social Security benefit – check to see how much you’ve paid into the Social Security system and how that will affect your retirement benefit.
Work and More
You may not plan to retire completely, choosing instead to work part-time, become a consultant, freelance, or even start your own business. Using this income puzzle piece will allow you to reduce the amount of income you need to take from retirement savings. It may also provide other benefits such as healthcare, dental care, life insurance, and more.
Of course, if you earn money while retired, there are some things to keep in mind:
- If you retire before the Social Security full retirement age and choose to take Social Security benefits, earning money from employment may reduce your payments until you reach full retirement age. For pensions, this is not typically the case, but you need to check with your pension provider.
- Some employers offer “semi-retirement” plans that allow you to begin taking a portion of your pension at retirement age but continue working part-time. Consult with your employer if this is something you’d like to consider.
Working is not the only activity in which you might produce income. Others include:
- Owning rental properties
- Renting extra bedrooms in your home through channels such as Airbnb
- Selling or continued income from intellectual property
- Running an online business
Retirement Savings and Investments
Most Americans save money for retirement through tax-advantaged plans such as IRAs and 401(k)s. You may even have some retirement savings in taxable accounts. Upon retirement, these income puzzle pieces will be used to create an income.
How you choose to do this will depend on the amount of money you need, when you need it, how the required income will affect future income, your life expectancy, current asset allocations, and the tax implications involved in getting the money.
You have the option to:
- Withdraw money – either regularly or periodically
- Choose an annuity – may provide either a guaranteed monthly income or varied periodic income(subject to the claims-paying ability of the issuer)
- Changing to income-generating investments – like annuities, this income may be steady or varied
In all likelihood, you’ll use a combination of these techniques, always keeping in mind your needs now and in the future, as well as the right order in which to use the money (determined by tax considerations).
Finally, once you reach the age of 70 ½, you must take a required minimum distribution (RMD) from some of your accounts. Failing to do so can lead to steep penalties, often equally 50% of the amount you did not withdraw.
Another income puzzle piece is inheritance. This could be an inheritance you’ve already received or one that you plan to receive during your retirement years.
If you are counting on an inheritance as part of your retirement income, be sure that your parents have used estate planning tools. This will help reduce estate taxes upon their death, providing more of the inheritance they hoped to leave to their loved ones.
Equity in Your Home or Business
The final puzzle piece we will discuss today is home and business equity. If you have substantial equity in your home or own it outright, you may be able to use that equity as a source of income.
There are a few different ways to use your home’s equity:
- Sell your home and downsize, using the rest of the money as income or to invest in income-producing assets
- Sell your home and buy another home in a less expensive area of the county, using the extra money for income
- A reverse mortgage. To learn more about it, click here for a useful publication titled “Reverse Mortgages: Avoiding a Reversal of Fortune” Source FINRA-Financial Industry Regulatory Authority
Getting the equity out of a business is a bit trickier, so you should discuss financial planning strategies that allow you to minimize taxes and create appropriate agreements with any partners involved.
As you can see, there are many different puzzle piece options for potential sources of income. You may have even discovered a few that you hadn’t considered before. To learn more about these retirement income options and how they fit into your retirement plan, click here to connect with us.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual
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