Sources of Retirement Income
Most working Americans have only one source of steady income: their job. In retirement you are likely to have a patchwork quilt of several income streams. Retirement accounts, Social Security, home equity, pensions, and part-time work are the most frequently citied sources of expected retirement income. Let’s take a look at potential sources of retirement income.
Retirement accounts. A 401(k), IRA, Keogh, or other retirement account is how many workers plan to primarily finance their retirement. Many Americans expect to rely on tax-deferred accounts when they retire, however, “statement shock” that confronts workers when they check their 401(k) statements and see major declines in the value of their savings, prompts many to investigate other options. Qualified retirement accounts are a great way to save for retirement, but, as you approach retirement careful planning should be given to converting those accounts into an income stream that will last for the rest of your life.
Social Security. Many Americans expect Social Security to be a major source of retirement income. There is increasing pessimism about social security because of inadequate funding and increasing government deficits for social welfare programs. The solvency of Social Security is a perennial debate among economists and politicians, but very little is actually being done about it. The most important consideration is whether social security will provide adequate income to provide the lifestyle you want in retirement. If not, then where do you find the remaining income that you will need to sustain you for the rest of your life.
Stocks and Bonds. Some Americans are expecting to rely on dividends from individual stocks, bonds or stock mutual funds in retirement. Unfortunately these dividends can vary and are not guaranteed for life.
Savings. There has been a resurgence of interest in completely safe savings vehicles such as certificates of deposit and savings accounts. Many Americans expect to rely on these FDIC-insured accounts when they retire. Unfortunately interest rates fluctuate and are currently so low that many retires have to tap into the principal to cover ordinary expenses and create a declining pool of money from which to draw income. Once the money runs out, the income stops.
Pensions. Consider yourself lucky if you still expect to receive a pension in retirement. This used to be a mainstay of retirement planning for many Americans but very few companies offer pensions and many of the railroad and civil service pensions have limited availability to newer employees. Most pensions have reduced benefits to the spouse if the pensioner dies before the spouse.
Rent and royalties. A book or a rental property can bring in income long after you leave the workplace. About 6 percent of Americans expect rent and royalties to help finance their retirement. Rental properties require management and maintenance, which can become increasingly cumbersome as you age.
Inheritance. You could, of course, wait for your wealthy parents or relatives to help finance your retirement (and hope they don’t write you out of their will).
Annuities or insurance. More and more Americans are planning to rely on an annuity or some form of insurance product to finance retirement. An annuity is the only source of “guaranteed income for life”. The guaranty is not from the federal or state government, but from the Insurance Company. It is very important to select a financially stable insurance company that has the demonstrated track record of consistently paying claims. Several rating agencies rank insurance companies for their claims paying ability and financial strength and outlook. The four major insurance company rating agencies in the U.S. are A.M. Best, Moody’s, Standard and Poor’s and Fitch.
Part-time Work. More and more “retired” Americans find that their income doesn’t meet their needs and have to find part-time work to supplement their income. More appropriately these persons might be categorized as “Part-Retired”. Unfortunately, these part-time opportunities are often not in their field of competency and provide much less income then when employed in their specialty field. Additionally, because of declining physical stamina, the reliability of continued income is limited.