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Where is Your Income Coming from in Retirement? Do You Know?

Budgeting Finance Income Investing Retirement Income Planning

There was a time in the not-so-distant past when you retired with a pension and Social Security, and you could count on the income from those sources to be enough to maintain your lifestyle in retirement. The average lifespan was also considerably shorter, so you could reasonably expect your pension and Social Security to last through your retirement.

But times have changed. Today, fewer people are retiring with pensions, and Social Security is rarely enough to allow people to retire comfortably. And because we are living longer – on average about 10 years longer than in the 1960s – we also have to account for longevity risk, which is to say that we need to make sure our retirement income doesn’t run out before we do.

Because of factors like these, planning for retirement has become significantly more complicated, especially for DIY-ers. Instead of one or two retirement income streams, today’s retirement income typically comes from many different sources. This is a good thing, because diversified retirement income offers quite a few benefits, from insulating against across-the-board losses to allowing you to withdraw from one account while another continues earning income (or before you are eligible to withdraw from another account).

However, when you have multiple retirement income streams, it’s wise to work with a retirement income planning professional.

Let’s take a look at some common retirement income streams you may already have or might consider.

 

Talk with us. Contact the professionals at Align Wealth Partners to schedule a complimentary consultation. 

 

Pension

A private pension plan is one in which an employer designates a pool of funds to be invested on behalf of its workers, who will get a fixed payout upon retirement. Pensions are typically distributed as either a lump-sum amount or regular annuity-like payments, which a retiree can collect as long as he or she lives. Pensions are ideal retirement savings vehicles because retirees can count on pension income regardless of the market. But unfortunately, they are disappearing as an option for many employees since they are more expensive to fund and maintain than other retirement fund options, like 401(k)s. 

Learn about the different ways you can receive your pension income – and which way is best for you – in our recent blog post: Petrochemical Employee Retirement Planning: Pensions and Lump Sum Distributions

Retirement Plans 

There are a number of different retirement savings plans you may have. And chances are, you have more than one. It’s important to work with a retirement income planning professional who understands the various platforms. Here are a few: 

  • A 401(k) plan allows you to contribute a portion of your paycheck, before taxes are deducted, toward tax-deferred investments, reducing your taxable income for the year. Some employers match employee contributions, as well, although the employer’s contributions usually have a vestment period, which means you have to stay with the employer for a certain number of years before you can “keep” the employer’s contributions.
  • With a traditional IRA, you can deposit money into an investment account, the gains of which are not subject to annual taxes. If you don’t also have a 401(k), you may be able to deduct your IRA contributions from income taxes, reducing your taxable income for that year.
  • A Roth IRA offers tax-free growth and tax-free withdrawals in retirement, but unlike a traditional IRA, contributions to a Roth IRA are made with post-tax funds.
  •  A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax-deferred retirement savings plan for small businesses with 100 or fewer employees. The beauty of SIMPLE IRAs is, as the name suggests, they are easy to set up and have little paperwork requirements.
  • A Simplified Employee Pension (SEP) IRA is a tax-deferred savings plan similar to a SIMPLE IRA, but unlike the SIMPLE IRA, which is available to employees of small businesses and companies, SEP IRAs are available to those who are self-employed, own a business or earn freelance income.

Life Insurance

Life Insurance Retirement Plans (LIRP) offer tax-free advantages, similar to those of a Roth IRA, but be forewarned that they can be complex and expensive, and very specific requirements must be met. With a LIRP, your policy grows cash tax-free during the years you contribute to it, and you can take tax-free loans from the policy. There are no income thresholds or contribution limits. However, there are Employee Retirement Income Security Act (ERISA) rules that a LIRP must follow, and there are tax implications that must be considered.

Social Security  

You might be better off thinking about your Social Security benefits as a bonus rather than an income stream, because the amount you receive from Social Security isn’t typically enough to live on alone. The future solvency of Social Security is also possibly questionable.

Talk with a retirement income planning professional to understand your options when it comes to Social Security and what you can expect. 

Other Potential Sources 

There are other ways you can make money in retirement than your retirement plans. 

Selling your home, for instance. If you own your home outright, and it’s more home than you need at this point in your life, you may be able to sell it and buy a smaller, less expensive home, then invest the proceeds or put them in savings. 

Many retirees downsize in retirement or relocate for better weather, cost of living or family situations. You can read about a few of the reasons why retirees choose to retire in Baton Rouge in our recent blog post: 8 Reasons to Retire in Baton Rouge

Real estate is another income booster for retirees. 

For many people, rental income can be a great source of funds in retirement. Some retirees buy a property outright, while others put money down and mortgage the rest. (As long as you get a good interest rate and can expect rental income that significantly exceeds the mortgage payment, this may be a good option for you. Just be sure you don’t overextend yourself.) Talk with a financial advisor before taking the leap into real estate as an investment. 

A part-time job provides yet another income stream for some retirees. 

While some retirees look forward to simply relaxing and enjoying their Golden Years, others enjoy taking a job they want to do (as opposed to one they have to do). Part-time work can be a great way to stay busy in retirement and maintain social connections. Some retirees even consider starting their own small business. This income, no matter how small, can contribute to your other retirement income streams.

Again, it’s wise to discuss your plans with a financial advisor to help ensure the decisions you make are right for you. Working in retirement can have an effect on your other retirement income streams, such as Social Security. 

How an Advisor Can Help 

Talking to a financial advisor at any step of the way, whether you’re just creating or diversifying your retirement income streams, organizing and managing your existing sources of retirement income, or already in retirement and trying to navigate withdrawal options and other factors, is wise. 

We recently published an article on what to expect at the different stages in life and how a financial advisor can help. You can read it here: Financial Planning for the 5 Stages of Life

A financial advisor can help determine your expenses and withdrawal needs, in relation to tax liabilities and Required Minimum Distributions (RMDs). Having a well-designed strategy for managing your multiple streams of retirement income will help maximize your continuing asset growth.