Planning for your future retirement income needs is one of the most challenging financial tasks you will face. There is a lot of uncertainty surrounding the future of the economy, as well as your potential life expectancy. Some factors, such as market performance, inflation impacts, and tax rates, are beyond your control. However, you can control your monthly budget and how much you save in preparation for retirement. This blog post will detail the most common sources of diversified retirement income that we see with our clients.
Part-Time Employment in Retirement: Pros, Cons, and Tips
First, I wanted to address the fact that we see a decent amount of our retired clients pursue some sort of part-time employment. This is a great way to supplement your other retirement income sources and will certainly help improve your financial plan. However, our clients tend to work part-time simply to keep themselves busy, or they consider it as a hobby. Working 40+ hours your entire life to working 0 hours a week can be a drastic change, and many individuals or couples struggle with the extra time in their day. Part-time work can be a great way for retirees to stay active and social while also increasing their retirement income.
Recurring Benefit Payments for Retirement: Social Security, Pensions, and Annuities
Perhaps the most beneficial source of income to have is a recurring benefit payment. This could be your Social Security benefits, which may vary depending on the specific age which you activate the benefits, or you could be provided a pension income benefit throughout retirement from a previous employer.
Pensions are becoming increasingly rare, so we have clients who are choosing to fund their own “pension” benefits with an annuity policy with income riders. You can read more about these in our previous blog post on Annuity Income in Retirement. All of these income sources are backed by either the U.S. government or a financial/insurance institution. This means that you can potentially receive a lifetime income stream throughout retirement to help pay for your monthly expenses.
Investment Income for Retirement: Withdrawals, Dividends, and Rental Properties
The next most common source of retirement income comes from investments made during the working years. This is usually in the form of retirement or brokerage account withdrawals or payouts of dividends from the underlying positions. These investments can grow over time to provide a comfortable nest egg that can be used to cover monthly expenses in retirement. However, it is important to limit withdrawals to ensure that your savings do not outlast you.
Another source of retirement income is rental properties. Instead of investing in the market, some clients choose to invest in real estate, which provides an income stream with the potential to sell the property for a lump sum. The income and property value may fluctuate due to changes in the economy, so it is not as promised as the items we mentioned above. These fluctuations make real estate income less predictable and an overall riskier strategy than other streams of income.
Choosing the Right Mix of Retirement Income Sources: Assessing Your Risk Tolerance and Creating a Plan
It is important to note that your risk tolerance will play a big part in determining which route you should focus on diversifying your retirement income. Those who are more conservative would appreciate the peace of mind associated with the recurring income options. This means that our low-risk clients tend to gravitate towards taking the pension option from their employer if they are offered a lump sum alternative, or they might decide to fund an income annuity rather than keep the savings invested in the market.
More aggressive clients would prefer to invest their savings and potentially grow their assets in addition to making withdrawals for income needs. Aggressive clients might see more fluctuations in their account balances, and they may face struggles if the market experiences a severe downturn, which may cause a reduction in spending to offset the lower account values.
Diversify Your Retirement Income – Highlights
- Part-time work is a great option for retirees to consider to supplement retirement income while also keeping themselves busy.
- Recurring income sources may include Social Security, Employer Pension, or Annuity Income benefits.
- Investment income may be derived from a retirement/brokerage account or a portfolio of rental properties.
- Your risk tolerance can be used as a gauge to determine how much of your retirement income should be protected.
Speak With a Trusted Advisor
If you have any questions about strategic travel budgeting, our investment portfolio, taxes, retirement planning, our 401(k)-recommendation service, or anything else in general, please call our office at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation, please give us a call so we can discuss it.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Best Regards,
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink.
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