Planning for retirement can feel overwhelming but knowing where your money will come from is key to feeling secure. Let’s break down the different ways to fund your retirement and how to make the most of them.
1. Taking Stock of Your Income Sources
The first step is figuring out all the possible ways to bring in money during retirement. Here are some essential questions to ask:
- What income sources do you have?
- How much money will each bring in?
- How long will the income last?
- Can you count on it being reliable?
- Does it adjust for inflation?
- Are there flexible payout options?
Social Security
Social Security is a significant piece of the retirement puzzle for most people. Here’s what to keep in mind:
- How Much: The amount you get depends on your earnings and when you claim benefits. If you’re married, the higher earner might want to delay claiming benefits to maximize payouts.
- How Long It Lasts: Social Security pays for life, and when one spouse passes away, the surviving spouse can receive a higher benefit.
- Reliability: Some are concerned about Social Security’s long-term funding, but many experts believe it will survive with some adjustments. Plus, Social Security provides cost-of-living increases to keep up with inflation.
Pension Plans
If you have a defined-benefit pension plan, this can be another reliable income source. Here’s what to think about:
- How Much and How Long: These plans often pay a fixed amount for life, but you may have options for joint-and-survivor benefits or lump-sum payments. Starting early or delaying can affect how much you get.
- Reliability: Private pensions are usually pretty secure, thanks to protections like the Pension Benefit Guaranty Corporation (PBGC). Public pensions might not have the same safety nets.
Non-qualified Employer Benefits
These are additional benefits for high earners, but they come with unique challenges:
- How Much and How Long: These benefits often depend on the company’s financial health and are less secure than traditional pensions. Taxes are due when you get paid, and distribution options are limited.
- Reliability: Since these plans aren’t protected like pensions, there’s some risk if the company runs into trouble.
Part-Time Work
Staying in the workforce part-time can provide extra income and personal fulfillment. But it’s not always easy to predict:
- How Much and How Long: Earnings can vary, especially if you’re freelancing or consulting. Health issues or market changes can also impact your ability to keep working.
- Reliability: While part-time work has risks, it can also give you flexibility and help protect against inflation.
Business and Rental Income
If you own a business or rental property, these can provide steady income in retirement:
- Selling a Business: Installment sales can stretch out payments and taxes over time.
- Rental Properties: Income can be reliable, but don’t forget to account for costs like maintenance and property taxes.
Other Income Sources
Don’t overlook additional income options, like:
- Supplemental Security Income (SSI): For those with limited resources.
- Annuities: These can provide guaranteed payments for life or a set period.
- Charitable Remainder Trusts (CRTs): Great for combining philanthropy with a steady income stream.
2. Turning Your Assets Into Income
Your assets are just as important as your income sources. Start by making a full list of everything you own. Here’s what to consider:
Financial Assets
- Retirement Accounts: Contributions and investment growth from 401(k)s, IRAs, or self-employed plans like SEP IRAs are key.
- Taxable Investments: Stocks, bonds, and mutual funds can provide flexibility and growth.
- Emergency Funds: Having liquid cash on hand is always a good idea.
Real Estate
Your home can play a big role in retirement planning. Options include downsizing, renting out part of your home, or taking out a reverse mortgage. Vacation homes can also be rented or sold to generate income.
Other Assets
- Valuables: If you have collectibles or personal property, these could be sold if needed.
- Life Insurance: Policies with cash value or death benefits can offer extra support.
3. Keeping Your Assets Safe
Protecting what you’ve worked hard for is just as important as building it. Here are some tips:
- Insurance: Regularly check your homeowners, auto, and long-term care insurance coverage.
- Asset Protection: Use tools like retirement accounts, annuities, and state-specific rules to shield assets from creditors.
- Long-Term Care Planning: Consider insurance to help cover future medical or caregiving costs.
Wrapping It Up
Retirement planning doesn’t have to be intimidating. By understanding your income sources and using your assets wisely, you can create a plan that gives you peace of mind. Take stock of what you have, make a plan, and stay flexible so you can enjoy this next phase of life to the fullest.