If you're not thinking about how you'll support yourself in retirement, you should. The typical retirement income plan used to be referred to as a "three-legged stool," with Social Security, a pension, and personal savings as the legs. It's a rather wobbly stool these days, though, as few people have pensions, most Americans have far too little in retirement savings, and Social Security is insufficient to fully support most folks.
So spend some time figuring out how many legs your retirement stool will have, and what they will be. Below are seven sources of retirement income to consider, along with the usual suspects such as Social Security and 401(k)s plans.
1. Health Savings Accounts (HSAs)
If you have a high-deductible health insurance plan, you may be able to set up a Health Savings Account (HSA) through your employer. It's meant to cover healthcare costs, but it has a good retirement-savings element to it, as well. You park pre-tax money in your HSA and get an upfront tax break that year. Then you can use the money in the account, tax-free, for qualifying healthcare expenses, such as prescriptions, physician visits, lab work, and eye exams, and any money that remains in the account at the end of the year stays there. Here's the retirement kicker: Once you turn 65, you can take money out of the account for any reason, paying taxes on it at your ordinary income tax rate. In addition, while the money is in the account, it can be invested. The contribution limit for HSAs in 2020 is $3,550 for individuals and $7,100 for families. Those 55 or older may contribute an additional $1,000.
2. A part-time job
This is a more obvious source of additional retirement income that will be more possible in your early retirement years than your later ones. If you work, say, 10 hours a week and earn $12 per hour, you can collect about $520 per month (about $6,240 per year), pre-tax. That can be a very helpful sum. Working a cash register at a local retailer is one option, but some creative thinking can yield lots of other, perhaps more appealing, ways to earn money on the side. You might do some freelance writing or editing, for example, or be a neighborhood handy-person.
3. A fixed annuity
Most of us are out of luck when it comes to pensions, but you can set up dependable pension-like income for yourself via a fixed annuity. You pay an insurance company a certain sum and in exchange, you can collect monthly checks for a specified period or for the rest of your (and/or your spouse's) life. The table below offers a rough estimate of what you might receive in the current interest rate environment:
Annual Income Equivalent
Dividend-paying stocks are far from obscure, but many people haven't given them sufficient attention as a retirement income solution. Consider this: When researchers Eugene Fama and Kenneth French examined stock performance data from 1927 to 2014, they found that dividend payers outperformed non-payers, averaging 10.4% annual growth versus 8.5%.
Dividend income is less reliable than annuity income, but most healthy and growing companies that pay dividends will be trying hard to not have to reduce or eliminate them and will typically increase their payouts over time. That can help you keep up with inflation. Also, once you pass away, those stocks can be left to your loved ones. Imagine a portfolio that has $400,000 in solid dividend payers, with an overall yield of 4%. That would generate $16,000 annually or $1,333 per month.
5. Your home
Your home is another possible source of retirement income if you get a reverse mortgage. That's essentially a loan from a financial company with your home as the collateral. You get a lump sum from the company or monthly payments, and you don't have to pay the loan back until you're no longer living in the home. Learn more about reverse mortgages before rushing into one, as they are not good for everyone -- but they do serve some people well.
6. A new home
Another source of retirement assets can come from your home -- if you downsize into a less costly one. For example, you might sell your home and buy a smaller, less costly one in the same general area, or you might move to a region with a significantly lower cost of living. Either way, you can set yourself up to pay a lot less in mortgage payments, insurance, taxes, maintenance, and so on.
7. Your life insurance policy
Finally, if you have a "whole" (or "universal") life insurance policy (as opposed to a "term" one), you may be able to borrow against it or even cash it out ("surrendering" it). This is a bad idea if anyone -- such as your spouse, your children, or even your parents -- is relying on you financially, but if you got the policy when your kids were small and now they and your other loved ones are financially independent, it could be an option. Borrowing against a policy -- and getting money that is typically tax-free -- will reduce the death benefit, which can be restored when you repay the loan. Surrendering a policy will generally result in your paying a penalty and receiving taxable funds.
Come up with a plan
Don't assume that Social Security will be enough to support you in retirement because it probably won't. Give some thought to how you're going to live in retirement and come up with a good plan -- whether it's a three-legged stool, a four-legged one, or even one with five or more legs. It might look funny, but you'll be very happy to have it when you're retired.
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