Money Secret #4: Happy Retirees Have Multiple Income Streams
Money Is A River While You're Working And A Reservoir Once You Retire
Up to this point, we've covered the first three secrets of the happiest retirees. To recap:
The next money secret deals with how you are going bring money in the door once you head into retirement. While it’s nice to get a steady W-2 paycheck or pay ourselves (as business owners), we have to change our mentality before we head into retirement. When it comes to generating income, it’s a good idea to go from relying on one income stream to many. Essentially, you’re creating as many tributaries as possible to come together in one new, predictable larger stream. Look at it this way, money is a river while you’re working and a reservoir once you retire.
You likely already have ideas in your mind about where you can gain other income sources. This could include income from multiple pensions, social security, rental income, part-time work, or investment income all rolled into one large stream.
There are many retirees that may be ready to retire from a full-time career but are still interested in keeping up some part-time work. This can be a great stream of income. I like to suggest that for those who are interested in working part-time that you take on a job doing something that you are passionate about.
Maybe it’s something completely unrelated to what you used to do- or if you loved what you used to do, consider taking on part-time consulting opportunities. What better way to make money and stay engaged and active than to continue being paid for some of the things you were so good at before you retired?
While part-time work may be less tax efficient, less secure, and include fewer benefits, it’s a great way to keep the option of bringing in a supplemental paycheck once your main career comes to an end. And remember, think many small streams, not one big river.
Nearly all Americans, if you paid in during your working years, will receive social security payments at some point in their lives. According to the official website, 9 out of 10 individuals 65 and older receive social security benefits.
Social Security should not be scoffed at in terms of your retirement planning. Even with the potential changes on the horizon, it’s one of the streams you want flowing into your reservoir. While some people may get as little as $800 a month and others might receive more than $3,000 a month, the fact of the matter is that it’s another stream. And the great part about social security is that once it begins, you can rely on the numbers to generally stay about same with very modest increases tied to inflation.
Not too many people have pensions anymore, so if you are among one of the lucky ones, that’s great! Count this as another stream of income. If you are concerned that for some reason your company won’t pay you the pension that it has promised you, remember this: the Pension Benefit Guarantee Corporation (PBCG) is a U.S. government agency that operates to protect the retirement incomes of more than 40 million American workers in more than 26,000 private sector defined benefit pension plans.
The chances that a pension will change or default are actually very low and with the additional backstop from the PBGC, you should be safe. So if you have a pension, it’s very useful and reliable, and you can gladly let it flow into that reservoir.
Another great stream of income is rental income. There are two approaches you can take:
1. Wait for retirement and then use a portion of your nest egg to invest in income-oriented properties.
2. Become an accumulator of a rental real estate over time. Some different scenarios:
If you buy a house for $100,000 in cash and there’s no mortgage payment, you will be generating approximately $10,000 a year in gross rental income (a 10 percent gross yield on the cash you’ve invested); or
You put some money down (say, 20 percent) and borrow the remaining 80 percent from a bank (please see below regarding risks). As long as you have a reasonable interest rate on the loan, you should still have decidedly positive cash flow from the property.
In both instances, you now have an income- producing property that will pay you monthly cash flow for as long as the house is standing and you have renters. I have seen countless happy retirees use this methodology and turn a portion of their retirement nest egg into the income-producing rental property.
This can be a very effective use of a portion of your retirement nest egg. Not only is it very effective at generating cash flow, it can give you a part-time job managing the properties if you have a few of them. Some people really enjoy being a landlord. It keeps them busy and keeps another stream of income trickling into the reservoir.
*Please be aware that borrowing money is a great way to buy the right real estate and generate rental income- as long as you don’t overextend yourself. Make sure you only leverage what you can handle and not a penny more. What I mean by this is imagine all of your real estate loans were called at once. Sure you could sell properties and pay the loans off. But what if not? Think about the financial situation- banks are demanding their money back, calling your loans. If you don’t have the liquid resources to do so, and if your properties are illiquid, you can quickly become insolvent.
Be sure to keep this in mind before you take on too much leverage or debt.
The last stream of income is investment income. This is a little more complex and we'll talk about more when we get to secret #5.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make.
Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.