Up to this point, we've covered the first three secrets of the happiest retirees. To recap:
Money Secret #1: Decide what you want and how money will fuel the life you want to live
The next money secret deals with how you are going to bring money in the door once you head into retirement. While it’s nice to get a steady paycheck from an employer or pay ourselves (as business owners), we have to change our mindset 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 of income. 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 working at least part-time. In fact, an estimated 1 in 5 retirees continues to work in some capacity after leaving their full-time careers. If you're interested in working part-time to create an added income stream in retirement, consider taking 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, you might try part-time consulting. 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.
When considering part-time roles, look at both the pay and any benefits available. A lower rate of pay could be offset by generous benefits, such as paid time off, paid sick leave, or health insurance.
Nearly all Americans, if you paid in during your working years, will receive social security payments at some point in their lives. Over half of future retirees say they'll rely on social security as their main source of income, according to a Nationwide Financial survey.
When considering social security as an income stream for retirement, it's helpful to estimate what benefits you're likely to receive. The Social Security Administration offers an online tool that can help you do this but remember, this figure should be used as a guideline only and not a definitive measure of what you'll receive in social security benefits.
If you're married, consider which order it makes the most sense for you and your spouse to claim individual and/or spousal benefits.
Remember, the longer you wait to claim social security, the more your benefit amount can increase. By waiting until age 70 to begin drawing benefits, for instance, you could receive up to 132% of the amount you would be eligible for at your normal retirement age. If you can work part-time or live off your existing retirement savings longer, waiting for social security benefits could boost your income later.
Pensions offer regular payments to you in retirement, based on your work history and income. Pension payments can be paid out to you in a lump sum or annuitized on a monthly or yearly basis.
If you had access to a pension plan during your working years, don't overlook this income stream. And consider carefully whether you're more comfortable receiving payments in a lump sum or annuitizing them instead.
A lump sum can put cash in your hands, which can be helpful if you need money right away to manage retirement expenses. Annuitized monthly payments, on the other hand, can add to your existing income streams to help shore up your retirement budget.
Consider the potential tax implications of taking a lump sum from your pension versus annuitizing payments.
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 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 $12,700 a year in gross rental income, based on national averages. This is a 12.7% gross yield on the cash you've invested.
Or, you put some money down (say, 20%) and borrow the remaining 80% from a bank (please see below regarding risks). As long as you have a reasonable interest rate on the loan, you should still have a 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, but it can also 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.
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.
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.