Strategies to Generate Retirement Income
When you move from working life to retirement, your financial strategy changes in a big way. In retirement, you’re withdrawing from your accounts instead of adding to them, meaning your nest egg may shrink rather than grow. That’s an uneasy thought, because outliving your money is one of the biggest financial fears of retirees. But having a financial plan in place can help you feel more confident about the future.
There are numerous options for generating income in retirement and many ways to structure your income stream to maximize its longevity. The strategies for generating income can generally be classified as either fixed income or variable income. Fixed income sources make payments of a fixed amount on a fixed schedule. Variable income sources provide a rate of return that is determined by market forces and involve the potential for both greater risk as well as greater reward. In retirement, sources of variable income, such as stocks and bonds, can be a way for your nest egg to grow and not be eroded by inflation. But market declines can result in temporary investment losses and little or no income from these sources. Having a mix of fixed and variable income strategies means you can rely on fixed income for your living expenses while you wait for the market to rebound and keep your overall investment strategy on track.
A financial advisor can help you determine which approach, or combination of approaches, is right for you.
A quick look at six ways to generate income in retirement
Social Security may provide a fixed income stream that can be a significant part of your retirement income, but ideally it should be just one part of your overall retirement plan. While the maximum Social Security benefit in 2020 is $3,790 per month, most beneficiaries don’t receive that much. According to the Social Security Administration, retirement beneficiaries, on average, receive 40 percent of what they earned while they were working.
You can use this Social Security retirement income estimator to find out what your approximate Social Security benefit may be.
It’s also important to have a strategy for maximizing your benefits. For example, if you’re in a position to delay your benefits, it’s something to consider because you stand to receive a higher benefit the longer you wait. For example, if you start receiving your SSI benefit at age 67, you’ll receive more per month than if you started at age 62. A financial advisor can help determine the strategy that’s suitable for you based on your health, family history and income goals.
You can draw income from dividend-producing investments like mutual funds, exchange-traded funds, stocks and unit investment trusts, all of which are variable income sources. A dividend is the distribution of some of a company’s or fund’s earnings to shareholders. Dividends can be issued over various time frames — such as monthly, quarterly or annually — and with different payout rates that are decided by each company’s board of directors based on a host of factors, including net income and profit, needs for additional capital and economic forecasts.
Bonds and bond funds are fixed investment options. Bonds are debt obligations issued by entities, such as corporations, publicly owned utilities, and state, local and federal governments. Buying a bond means you are essentially lending your money to the entity for a stated period of time, which can range from three months to 20 years or more. In exchange, the entity pays you interest until the end of the period specified for that bond, known as the maturity date. At the maturity date, you receive your original investment or loan amount.
Bond funds are mutual funds or exchange-traded funds that invest in a portfolio of bonds. Most bond funds are made up of a certain type of bond, such as corporate or government, and maturity date, such as short-term (three years or less), intermediate-term (three to 10 years) and long-term (10 years or more).
Cash Value Life Insurance
In most cases, cash value life insurance can provide a federal-income-tax-free death benefit to be paid to a designated beneficiary at your death, but it can also accumulate tax-deferred cash value during your life. In other words, a cash value life insurance policy, such as indexed universal life, can provide your loved ones with a death benefit, and its cash value may also be used in the form of a loan to supplement your retirement income. This option can help you avoid increases to your effective tax rate, since a loan from an indexed universal life policy is generally not counted as taxable income.
Real estate can be a good variable-source investment for retirement, but making money typically requires a good amount of risk-taking and knowledge, including an understanding of the area where your real estate is located and being familiar with such things as contracting and maintenance costs, taxes, and record-keeping. There are several ways to invest in real estate, including buying land or a house and then “flipping” it for a higher price. Another is to buy properties that can produce income — office space, apartments or residential homes that can be rented out. Purchasing one or more rental properties can provide monthly income in retirement, but owning a rental property can be a lot of work, including maintenance, tenant issues, and tenant turnover and vacancies. And you should have a realistic understanding of the factors that will affect your income, including periods of vacancy and the cost of the monthly mortgage, if you have one.
Annuities can be fixed or variable and can be used to provide a tax-deferred income stream in retirement. Fixed annuities pay a guaranteed payout determined at inception. Variable annuities allow you to choose from available investment options within the annuity contract. Your fixed income stream is then determined when you begin taking income from the contract and is based on the performance of those investments selected.
A benefit of bank accounts — saving accounts, money market accounts and certificates of deposit — is that they allow you to hold assets in interest-bearing accounts that can be used for shorter-term spending or income, especially during market downturns. This can help you avoid dipping into your principal when variable income from other sources may be reduced. These accounts can also serve as emergency funds if unexpected expenses pop up, so that you don’t have to take money from other retirement funds, such as your pension, 401(k), IRA, or Social Security benefits. Most experts advise that an emergency fund should be able to cover 12 to 18 months’ worth of living expenses in retirement.
Your retirement income strategy should be customized to your unique risk comfort level, as well as your assets, tax situation and time horizon. Some strategies include one or two of the ideas above, and some are more complex. No matter your personal situation, it’s important to meet with an advisor who can help you tailor a strategy that’s suitable for you.
The earlier you start preparing for retirement, the more likely you are to enjoy your life after work. Learn more about how to plan for your ideal retirement.
Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.
Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.