July 8, 2016

Sources of Your Retirement Income

credit: dontinvestandforget.com

This question is posed to me often enough to prompt an attempt at an answer. Probably the number one fear of the majority of retirees is whether enough money has been saved and invested, along with expected income from Social Security and a pension to last until that person's death. Where does my money come from when the checks stop?

Obviously, I don't know your specifics since the answer depends on your resources and how long you live. But, I do feel confident in outlining a few basic responses to the question of income and retirement. And, I urge you to add a comment at the end of the post if another idea comes to mind.

So, what are the sources of income when the regular paycheck stops? You might be surprised by the wide range of possibilities.


Social Security

The basic foundation that most of us use for our retirement. Out of a population of 46 million over the age of 65, nearly 40 million receive a monthly check from the government.  25% of that total 40 million recipients are disabled or dependent folks, many under the age of 65.

The amount of the payment is based on too many variables for this post, but the more you made during your working days, the amount of time you were employed, and when you start taking payments, determines your monthly check. Delayed acceptance and spousal benefits are other factors. 

Usually the amount of your payment increases each year with a cost of living adjustment based on inflation. For 2016 there was no increase even though most of us saw health costs, for example, jump. The average Social Security check is $1,300 a month. Medicare premiums are deduced from that base amount.


Pensions

Roughly 22% of Americans still receive a monthly payment for life from their employer under a defined benefit plan. That is down from 42% less than 30 years ago and is likely to continue to shrink in the years ahead. Companies are finding the benefits are becoming too great to maintain, particularly in the area of health care. If you worked for the government you are probably in better shape. Close to 90% of full time workers continue to receive defined benefits pensions.

To millions of us, a promise to pay doesn't always mean the reality of payment. Under severe financial stress, companies have found ways around a pension promise, leaving too many folks in dire straits. Planning your future around a private sector pension is becoming a bit of a roll of the dice.


IRA/401(k)

If you work for a company that offers a 401(k) retirement plan and contributes a percentage of your salary, this could be an important linchpin in your income stream for retirement. Likewise, a well-funded IRA is often a key to a satisfying retirement. Since having both an IRA and a 401(k) is allowed, if you afford to do so but money in both starting as early as you can. For those over 50, there is a special provision allowing extra money to be put in an IRA each year. 


Remember, the money grows tax-free but you are only delaying the tax bill that comes due when you withdraw funds. Be sure to take that into account. Of course, a Roth IRA allows you to invest money that has already been taxed, meaning it grows and will be withdrawn without any other deductions.

Investments

This covers things like mutual funds, bonds, and stocks that you have placed money in over the years. While there are some tax consequences, like capital gains tax, your investments provide income as you need it.


Annuities

This investment choice contains many too many variables and cautions to detail here. If you'd like a simple overview, click this link or search Google for more information. Annuities are designed to provide a fixed, monthly income for life from a lump sum of money you turn over to a private company.


Part time work

For many retirees, some retirement income comes from a part time job. Depending on the state of the economy and your particular skills, this is one way to supplement other income sources. 


Hobbies/skills

Not that different from part time work, turning a hobby or skill into retirement income is a natural for many folks. Love woodworking? Make cabinets or coffee tables. Know how to build a website? Help small businesses establish their presence on the Internet. Love to paint or take stunning photos? Sell them online or in books. Have specific knowledge about a particular industry? Become a consultant. 


Inheritance

For the lucky few, parents or relatives will leave you money, investments, or property that can be turned into a steady source of income. Unless you are quite sure this will happen, I'd strongly suggest you don't build your retirement plan around this possibility.

Hopefully, this list should encourage you. With the eight income possibilities listed here, plus whatever readers add, the way to pay for a satisfying retirement is likely within your grasp.



29 comments:

  1. Great list; I think you have covered it!

    I would add to the comments on social security: the increase in benefit is 8% per year (up to age 70) for those who are able to delay taking their benefit. This is likely a better return than one can earn from investments. Some folks are not able to or should not delay for various reasons, but for some it will make good financial sense.

    The file and suspend with restricted application is an option that was ended by budget legislation last year. It allows couples to strategically maximize their benefits. However, those who were born before 1953 are considered grandfathered in. Here's a good link that explains it in detail. https://www.kitces.com/blog/congress-ends-file-and-suspend-restricted-application-and-other-voluntary-suspension-social-security-strategies/

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    1. The option to delay taking Social Security for as long as practical is an excellent strategy. You are correct: an 8% increase in monthly benefits for life by waiting is better than any safe return one can get today.

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  2. I wanted to alert people, as I just discovered it myself yesterday, that the IRS now has a new rule, effective for 2015 tax filings, that restricts the number of IRA rollovers you can do in a calendar year to one. The exact circumstances when the rule applies are detailed by IRS, so please don't get alarmed before you check IRS publications, if you think the rule might apply to you. For example trustee to trustee IRA "rollovers" are apparently not limited by the rule. Over a span of a few years I had several employers for short periods with small accounts with each. I'm just now trying to consolidate them, anticipating in a few years the age 70 1/2 tax trigger. After consolidating one, I was planning to do the same for another, when BREXIT hit. I then discovered the new rule. I'm not sure it will impact on me personally, but for some of you it might, and I was totally unaware of it. I think the IRS may have put this rule in place because the oldest Boomers turned 70 1/2 this tax year, and it may be trying to minimize tax avoidance maneuvering.

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    1. I read about that change but knew it wouldn't affect anything I was doing so I didn't follow up. Thanks for letting folks know it would be wise to get specifics if they think it may be part of their long term strategy.

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  3. A few more sources of income I can come up with off the top of my head:

    1. Male gigolo - I have not been successful at launching this endeavor yet; for some reason the wife is not on board with it.

    2. Playing every lottery out there - it's only a matter of time before I win, right? Isn't that the promise of the state lotteries?

    3. Marijuana farmer - I'll have to put some thought into this one since it is "technically" illegal in my home state.

    4. Professional unemployment check collector - unfortunately it appears I have a lot of competition in this country if I try that route.

    As for your list, Bob, stay away from annuities of any type/any description. They are outrageous ripoffs, and anyone can set up their own with one index fund and a ladder of CDs. If anyone says that cannot be done, how do you think the insurance companies do it?

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    1. My father-in-law tried the lottery approach. After his death we were getting mailers from all sorts of foreign countries for years.

      Annuities are interesting. Personally, I don't have any but I know they are promoted by a lot of reputable sources as a smart way to guarantee a retirement income.

      At the same time, comments like yours are just as common. The takeaway on annuities: do your homework.

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    2. This is just too too funny. Love it!

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  4. Bob, thanks for the reminder about the potential sources of retirement income. For those of us already retired, it's too late to do anything about it other than juggle the times for receiving pension, investment, IRA, and 401K payments/withdrawals. But I have to take issue with ChuckY about annuities. My university 403B plan was set up as an annuity plan, and I have been very happy with the systematic withdrawals that I have taken during my 12 years of retirement so far. My annuity accounts earn a combination of guaranteed income and more iffy income based on MY choices of how the money is invested. The company is TIAA.

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    1. Thanks, rporter. As with any investment, there are good ones and bad ones. It is our responsibility to decide what levels of risk, return, and expenses we are willing to live with. Obviously, annuities require special attention.

      One other potential source of income is tapping home equity, with things like reverse mortgages. They come with high initial costs but are worth looking into.

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    2. rporter610 - while you feel that the annuity is working for yourself (and TIAA is a good outfit, btw), why pay someone else the acknowledged high fees for something you can easily do yourself? You stated you have a combination of guaranteed income and more iffy income based upon your choices. Read what I wrote. I can do exactly the same thing as TIAA with a ladder of CDs (guaranteed income) and one or more index funds (iffy income). The key difference - I didn't pay high fees to someone else for something I could do very quickly myself. I have been educating people on doing your own thing whenever I can, and I'll continue to do so.

      That being said, IF someone insisted on an annuity, I would tell them to use only an outfit like Vanguard, or a TIAA if it was available to them. Vanguard does its best to cap costs at a more reasonable level for annuities.

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    3. I've been using laddered CD's for 22 years as the no-cost, no-risk part of our nest egg (the biggest part now). It's worked for us. I've had 22 pleasant years among the gainfully unemployed, and our net worth is somewhat greater that it was on retirement day.

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  5. Bob, just found and appreciate your blogs and people's comments. I used Eric Tyson's books and several online retirement calculators to see if we could meet our budget if I retired. Retired 5 months ago and have been loving it more every day.

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    1. Welcome, Gary, to the blog and retirement! Youy will find some great folks here sharing their thoughts and experiences.

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  6. I am still rolling over Traditional to Roth IRAs. I certainly don't want to be cut short in the end because someone decided that I would only live a certain amount of years (91 to be exact). Mom is 86 and her sisters are 88 and 89. They all are going for 100 (at least).

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    1. Visualizing how many years you might live is an odd process, but pretty much a necessity in financial planning.

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  7. Good post Bob and I agree with Carol delaying SS for the 8% annual gain, that a hard to beat annual return on guaranteed for life income. I know that finances are one of the main worries of pre-retirees and it was also something I worried about before I retired. I had been a good saver taking advantage of whatever tax assisted programs there were out there (no company pension on my part) but still I worried. Now that I am retired I wonder what I was worried about. Sure you can go through a lot of money if you are going to travel the world first class as they show in those "save for retirement" ads but in the main that's not real life. Being retired gives you the time to enjoy the simple activities that bring the most joy - hiking, riding a bike, grandchildren, being with friends etc. and that cost almost nothing. The best things in life really are free (or very nearly free). - David

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  8. I have a little bit of everything except the annuities. I learned from Suze Orman that they are a very bad investment. We get our retirement income from: a little bit of my social security, a little bit of hubby's pension, a little bit of interest on savings/investments & ROTH IRAs, a little bit of inheritance money, a little bit of hobby money (blogging & photography) and a little bit of husband's part time work. We still have one more social security check to collect (hubby's) but that's not for another 2.5 years. All those little bits make for one big monthly income haul. For us, there was no one big item we could depend on. Our system, combined with frugal living, has made our retirements possible.

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    1. My wife's social security payments start in a little less than 4 years. That money will go straight to vacation funds each year. It is a nice feeling that we aren't counting on it for living expenses or anything other than fun.

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    2. If you inherit an IRA you must take it as an annuity unless you want to pay taxes on half.
      I'm trying hard not to take Social Security until I'm 70, and the annuity comes in very handy!
      Also before the recession some annuities were paying high interest. Personally I thought, think, and hope I can do better. It's hard when you're single because the multiple sources all have to come from you, however it can be done, I hope.

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    3. You do not have to take an inherited IRA as an annuity. If the person you inherited it from was already required to take minimum distributions, you must take minimum distributions based on your life expectancy. You pay regular income taxes on that. I have been taking minimum distributions for seven years and the IRA balance is more than it was when I inherited it.

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    4. Donna, you are correct. When my dad died last year I inherited his IRA. I take the minimum distribution each year and pay taxes on it, just like my own IRA. There is no requirement to annuitize it.

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  9. Hi Bob. My social security income will begin in April next year when I turn 62. I’ve been using that date as a deadline to get my house in order, literally, by going through a decluttering process. That may be a topic for you to explore and write about. I know I’m not the only retiree with the dilemma of getting rid of “stuff”. I’ve read and reread Marie Kondo’s book, “The Life-Changing Magic of Tidying Up” which is helpful but it’s really a challenge to get down to only those items that spark joy. I would be interested in hearing what others have to say, and with your recent move you probably have lots of insight in that department. Love your blog!

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    1. I read the Kondo book a few months ago, too. I find her approach a bit over the top for me but I am a fan of decluttering and simplification. It has been a while since I had a post that focused on that subject so your suggestion is a good one.

      I am so glad you love the blog. Thank you!

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    2. I have been decluttering the Flylady way - 15 minutes a day. You wouldn't beleve wbat a difference 15 minutes can make! When you do a little bit every day you don't get overwhelmed.

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    3. I was inspired by Kondo's book as well, and now have quite a few empty areas and rooms in our home - our guest bedroom and bath, for instance, are completely empty save being furnished/provisioned for guests. Empty drawers, closets and cupboards . . . it's a marvelous feeling!

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    4. Getting ready for a downsizing to the beach?

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  10. The IRA Rollover limit is not an issue for most of us. The "limit" of 1 per 365 days only applies to rollovers where the IRA sends YOU the check and then YOU send it on to another IRA within 60 days. The issue was that by sequencing multiple rollovers, you could "float" that cash as a loan to yourself without paying it back (until you forgot to do the next 60-day rollover to pay yourself again). So combine IRAs all day long to your heart's content, provided you have the check sent Trustee-to-Trustee and not to you. Only get an IRA check sent yourself when you are cashing and keeping it -- monthly is fine, even weekly. But you can only send it on to another IRA (and not count it as a disbursement) once per 365 days.

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    1. Thanks for that clarification. As you note, most of us will not be affected, but for those who are the tax consequences could be substantial.

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