Americans aren’t as happy in retirement as they used to be, and lack of adequate income coupled with high inflation is one likely culprit.
According to the Employee Benefit Research Institute, retirement satisfaction was down in 2022 with many retirees worried about higher consumer prices, low savings funds and a general disillusionment about the reality of retirement living compared with expectations going into their post-career years.
There’s not much retirees or near-retirees can do about higher prices or new realities in their golden years, but there is something they can do about low cash levels. It’s all about having and funding a variety of income streams, which can offer protection in case one revenue source doesn’t work out.
“The biggest financial threat retirees face is that they will outlive their money — called longevity risk,” said Scott Heise, a wealth management advisor at TIAA, in East Lansing, Michigan. “When you think about it, you can’t just consider what you have in your bank accounts and predict whether that’ll be enough. That means you’d have to make withdrawals and hope you outlive (your) money, and hope is not a prudent strategy.”
[READ: 9 Retirement Distribution Strategies That Will Make Your Money Last.]
Diversification of income can help prevent you from outliving your retirement savings, and setting up these income sources is ideally done in the run-up to your retirement years. This is a tall order, and you’ll need to bring a healthy dose of discipline and creativity — not to mention cash — to the table.
Here are the most effective income streams in retirement. Line yourself up to access as many of those cash sources as possible.
— Social Security.
— Company or government pension.
— Annuities.
— 401(k) or IRA.
— Roth accounts.
— Stocks and mutual funds.
— Bonds.
— Savings accounts and CDs.
— Part-time retirement job.
— Paid-off house.
Social Security
Almost all Americans will receive monthly payments from the Social Security Administration in retirement. Social Security payments are particularly valuable because they are guaranteed to keep up with inflation, and retirees receive inflation-adjusted payments each January.
You may be able to increase your monthly checks by carefully weighing when to start collecting Social Security. The longer you wait to sign up for Social Security between ages 62 and 70, the higher your monthly payments will be.
“For now, Social Security can give you a boost later in life, but it’s important to be intentional about when you begin taking payments. Basically, the earlier you start collecting Social Security, the lower your payouts will be,” says Mark Henry, founder and chief executive officer of Alloy Wealth Management.
If you have more working years than your spouse and have contributed more to Social Security over the years, your payouts will be larger.
“You may want to delay collecting Social Security in this case, especially if your spouse is younger,” Henry says. “If they outlive you, they can drop their own Social Security benefits and continue taking yours after you die.”
[READ: How to Maximize Social Security With Spousal Benefits.]
Company or Government Pension
Although only a small fraction of workers get them, there are some jobs that still provide a pension for retired workers. A pension is one of the best ways to maintain a steady stream of income in retirement.
“A pension assures you’ll have a reliable monthly check for the rest of your life, and any money left over after your death can be directed to your family,” Henry says.
Private-sector pensions are guaranteed by the Pension Benefit Guaranty Corp., a government agency that insures pensions, even if your employer goes out of business. Some people create pensions using their own savings by purchasing an immediate annuity.
Annuities
Fixed or variable annuities with guaranteed lifetime withdrawal benefits provide a consistent stream of retirement income.
“An annuity will pay you the same income amount for the rest of your life, even after the account has run out of money,” Henry says.
Some planning is necessary before you decide on an annuity, as the pricing of annuities is something many investors likely won’t understand.
“First, buying annuity income is most expensive when interest rates are low,” says Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business. “This is because the annuity provider takes the money you pay them and invests, primarily in bonds, and the lower the rate environment, the lower their expected return.”
Annuities are also more expensive for older investors. “That’s because a 60-year-old will start drawing retirement income sooner than a 30-year-old,” Johnson notes.
Since the varieties of annuities and their specific terms are wide, investors should talk with a trusted money management professional to properly analyze their annuity options.
401(k) or IRA
A retirement account, such as a 401(k), 403(b) or IRA, offers both the freedom to invest your funds and opportunities for growth.
“However, a considerable degree of strategy is required as you determine which investment vehicles you’re going to use, such as stocks, bonds or ETFs,” says Brad Zucker, president of SMA Wealth Management in Las Vegas.
It may be necessary to get creative with your retirement accounts to fuel portfolio growth that can help carry you financially into old age.
“Retirement investors have experienced ‘whipsaw’ volatility as it relates to their public asset portfolios over the past three years, with 2022’s decrease in both equities and bonds amplified by runaway inflation,” says Milind Mehere, CEO at Yieldstreet, a digital wealth management platform. “For younger Americans with a longer time horizon, these moves may eventually be a blip on the radar, but older Americans in or nearing retirement are feeling the squeeze from both ends.”
To Mehere, the historical 60/40 equity/bond allocation is no longer a viable strategy, mainly because increased correlations across assets and sectors lead to boom and bust outcomes.
“We recommend enhanced diversification through alternative investments, which provide reduced correlation and increased return potential in a modern portfolio of, say 40/30/30 equities, bonds, and alternatives, respectively,” Mehere says. “This modern portfolio is more accessible to investors than ever, including the ability to invest in alternative asset classes (such as real estate, private credit and private equity) within tax-advantaged accounts.”
[READ: Retirement Accounts You Should Consider.]
Roth Accounts
You can add tax diversification to your portfolio by prepaying the income tax on some of your retirement savings with a Roth 401(k) or Roth IRA. Contributions to Roth accounts are made with after-tax dollars, and withdrawals after age 59 1/2 from an account that’s at least five years old, including the earnings, are tax-free. Roth IRAs don’t have distribution requirements in retirement, so the money can continue to grow tax-free until you need it or be passed on to heirs.
“If a near retiree has funds in a taxable account, it always makes sense to transfer those funds into tax-deferred accounts that are designed for retirement,” says Robert Reilly, a finance faculty member at Providence College School of Business and investment consultant at North Atlantic Investment Partners. “A Roth IRA is key as any after-tax funds contributed can be taken out of principal at any time.”
Stocks and Mutual Funds
Many people gradually shift to more conservative investments as they approach retirement. However, healthy individuals can expect to spend several decades in retirement. You may want to keep some of your savings in the stock market in retirement to ensure continued growth in your portfolio and to keep up with inflation. While you should keep money you need for near-term expenses out of the stock market, carefully consider your risk tolerance for keeping a portion of your retirement savings in equities.
Bonds
Bonds are generally less volatile than investing in the stock market. Many bonds provide a relatively predictable stream of retirement income with limited potential for losses. Some types of bonds, such the Treasury’s inflation-protected securities, or TIPS, promise a rate of return above inflation. Holding other types of bonds, such as municipal bonds, can provide tax benefits.
Savings Accounts and CDs
Many retirees keep one or more years’ worth of living expenses in a savings account or a certificate of deposit. These conservative savings vehicles are usually backed by the Federal Deposit Insurance Corporation, which typically insures up to $250,000 per depositor at a given insured financial institution.
Part-Time Retirement Job
Many people continue to work part time in retirement because they need the money and enjoy their work. Even a few hundred dollars a week from a part-time job can cover basic necessities like food, fuel, utilities and some health care expenses. That leaves more cash on the table from your other retirement income sources to enjoy your favorite lifestyle pastimes.
Note that adding work income to your household funds may have an impact on taxes and on your Social Security. That’s because any income earned on the job is taxable, and the money could be taxed by the IRS. Also, retirees who work part time will see moderately lower Social Security payments until their full retirement age.
[See: 19 Part-Time Retirement Jobs That Pay Well.]
Paid-Off House
Owning a home mortgage-free means that you have eliminated one of your biggest monthly expenses. While you will still need to pay for taxes and insurance on the property, that is likely to be a small fraction of the cost of mortgage payments or rent. If an emergency crops up later, you may be able to tap the equity in your home using a loan or a reverse mortgage. You could also downsize to a less expensive home and add the difference in price to your retirement savings.
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Essential Sources of Retirement Income originally appeared on usnews.com
Update 04/20/23: This story was published at an earlier date and has been updated with new information.
