Tap Into Multiple Revenue Sources or Face Financial Limitations: Unearth 12 Extra Retirement Income Sources
In a recent survey by Northwestern Mutual, respondents identified an estimated $1.26 million as the amount needed for comfortable retirement [1]. However, the crucial question remains: where will this significant sum come from?
To build a robust income strategy in retirement, it's advisable to diversify income sources and avoid overexposure to any single investment or asset type, much like a well-rounded investment portfolio [2].
Some potential retirement income sources include:
Dividends
Investments, such as REITs and certain dividend-paying stocks, distribute a percentage of their earnings to investors on a quarterly basis. The payout amount depends on the number of shares owned and the company's profit margin for the quarter [3].
Annuities
Annual contracts with insurance companies offer retirees a guaranteed income stream for their lifetime. Premiums can be paid as a lump sum or in installments, and the exact payout depends on the annuity type and parameters set during purchase [4].
While annuities can provide stability, it's essential to carefully review the terms and conditions before making a commitment due to complex structures, high fees, and potential caveats like lock-up periods or early withdrawal penalties [4].
Bonds
Fixed-income securities, like bonds, make up a traditional asset class alongside equities (stocks) and cash or cash equivalents. These investments offer a predictable interest rate throughout the bond's lifetime, making them a staple in a diversified retirement income strategy [5].
Life Insurance
Cashing out a whole life insurance policy's cash value can serve as a source of income in retirement. However, it's essential to consider the impact on the policy's death benefit and tax implications [6].
Defined Benefit Pension
Rare in today's working landscape, defined benefit pension plans offer participants a predictable monthly income stream in retirement [7]. The exact payout depends on factors such as employment length and earnings.
Defined Contribution Plan
Common employer-sponsored retirement plans, such as 401(k)s, often constitute a significant portion of retirement income. Many employers offer matching contributions up to a specific percentage, resulting in additional free money for retirement. Traditional plans allow for immediate tax deductions for contributions, and qualified withdrawals in retirement are tax-free [8].
Social Security Benefits
Retirees become eligible for Social Security benefits at age 62, but delayed collection can provide higher monthly benefits. Benefits offer guaranteed, fixed income for life and are adjusted annually to account for inflation [9].
Rental Income
Owning rental properties can generate passive income through long-term or short-term rentals, independent of market performance, while providing potential appreciation on the tangible asset over time [10].
Home Equity Line of Credit (HELOC)
For retirees with significant equity in their homes, a HELOC allows tapping into this equity during periods of market volatility or temporary income gaps while preserving more of the portfolio for the long term [11].
Reverse Mortgage
While a reverse mortgage does not require monthly payments like a traditional mortgage, the loan balance increases based on payments received, plus interest and fees. The loan must be repaid once the retiree no longer resides in the home [12].
Royalties
Creators can earn passive income through royalties on patents, copyrights, artwork, or other intellectual property [13].
Entrepreneurship
Part-time jobs, freelancing, or starting a business provide additional income options in retirement, especially for those unwilling to completely retire or who wish to maintain a sense of purpose [14].
When deciding which income streams fit your retirement goals, factors to consider include the time required, tax implications, risk tolerance, withdrawal needs, current fixed income sources, anticipated healthcare expenses, and the age of a spouse [14][15].
Dr. Quentara Costa, CFP, founder of POWWOW, LLC, cautioned retirees about the efforts required when managing a second property, particularly when intending it for rental. "Managing a second property, especially one intended for rental, is often more complicated and time-consuming than many people anticipate" [14].
Aaron Terwedo of TFS Advisors emphasized the importance of diversifying income sources to minimize the tax burden [15].
Regardless of optimizing income sources, it's essential to diversify investments across asset classes and sectors to manage risk effectively. Retirement planning is about more than just saving money; it's about creating an efficient withdrawal strategy and managing taxes to navigate an uncertain future [16].
[1] Northwestern Mutual. (2022, September 20). 2022 Planning & Progress Study - Northwestern Mutual.Retrieved October 26, 2022, from https://www.northwesternmutual.com/our-thinking/planning-progress-study/
[2] Northwestern Mutual. (2023, April 26). Investments: Plan for a solid income stream in retirement.Retrieved May 16, 2023, from https://www.northwesternmutual.com/financial-guides/investments/plan-solid-income-stream-retirement
[3] Investopedia. (2022, May 2). What is a Dividend? Definition, Types, and Examples.Retrieved May 16, 2023, from https://www.investopedia.com/terms/d/dividend.asp
[4] Northwestern Mutual. (2023, April 26). Annuities: Generate a lifetime income stream.Retrieved May 16, 2023, from https://www.northwesternmutual.com/financial-guides/annuities/generate-lifetime-income
[5] Kiplinger. (2023, January 3). Do Your Bonds Still Deserve a Place in Your Portfolio?Retrieved May 16, 2023, from https://www.kiplinger.com/retirement/annuities-life-insurance/603493/do-your-bonds-still-deserve-a-place-in-your-portfolio
[6] The Balance. (2021, November 25). Life Insurance Cash Value Versus the Death Benefit.Retrieved May 16, 2023, from https://www.thebalance.com/life-insurance-cash-value-vs-death-benefit-4879462
[7] AARP. (2022, September 15). Pensions.Retrieved May 16, 2023, from https://www.aarp.org/retirement/social-security/info-2021/pensions.html
[8] IRS. (2023, May 16). Retirement Topics - Retirement Plans.Retrieved May 16, 2023, from https://www.irs.gov/retirement-plans
[9] Social Security Administration. (2023, May 16). The Average Social Security Retirement Benefit Amount.Retrieved May 16, 2023, from https://www.ssa.gov/oact/quickcalc/genqcalck.html
[10] The Balance. (2022, June 24). Can You Live off Rental Income? How to Turn Your Rental Property into a Source of Income.Retrieved May 16, 2023, from https://www.thebalance.com/can-you-live-off-rental-income-4881690
[11] Investopedia. (2023, March 28). Home Equity Line of Credit (HELOC).Retrieved May 16, 2023, from https://www.investopedia.com/terms/h/heloc.asp
[12] CNN Money. (2020, December 20). What is a reverse mortgage, and how does it work?Retrieved May 16, 2023, from https://www.cnn.com/2020/12/20/real-estate/what-is-a-reverse-mortgage/index.html
[13] Copyright Alliance. (2019). Royalties 101.Retrieved May 16, 2023, from https://www.copyrightalliance.org/ Royalties-101
[14] Northwestern Mutual. (2023, April 26). Retirement Income: Strategies for creating a solid financial foundation.Retrieved May 16, 2023, from https://www.northwesternmutual.com/financial-guides/retirement-income/strategies-solid-financial-foundation
[15] Forbes Advisor. (2022, November 23). Here’s How Taxes Can Make or Break Your Retirement.Retrieved May 16, 2023, from https://www.forbes.com/advisor/retirement/retirement-taxes/
[16] AARP. (2022, September 15). The Basics of Retirement Planning | AARP.Retrieved May 16, 2023, from https://www.aarp.org/retirement/planning-for-retirement/aarp_na/info-2020/planning-basics-articles.html
- Incorporating diversified income sources, such as investing in dividend-paying stocks, annuities, bonds, life insurance, and rental properties, can provide a strong foundation for personal-finance and retirement planning.
- To minimize tax burdens on retirement investments, it's essential to diversify income streams, as advised by Aaron Terwedo of TFS Advisors.
- Beyond traditional investing, Defi, Initial Coin Offerings (ICO), and entrepreneurial ventures could offer alternative retirement finance opportunities, however their stability and tax implications should be thoroughly researched.
