You’re doing everything right as you get ready for retirement: You’ve made a plan and engaged a financial advisor to help you identify and meet your goals, whether that’s increasing your wealth or simply not running out of money during your retirement years. How much have you really thought about your retirement income though? Do you know everything you need to know?
What You Need and What You Want
For most people, getting a handle on retirement income starts with determining what they need and what they want in retirement. Think about your goals for retirement. Do you want to live the same lifestyle? Are you willing to make changes? Do you want to travel, indulge in your hobbies, or spend more time with your family? All of these questions will help you determine what your retirement income needs are. Once you’ve determined what you need or the goals you want to reach, you will need to think about retirement income itself.
Where Does the Money Come from?
The truth is how you will generate your retirement income is just as important, if not more important, than how much you need or want.
While you’re working, your income is the money you generate through your labor. Once you retire, you won’t be working any longer, which means that steady stream of income evaporates. So, where does the money come from? Most people will rely on Social Security plus a 401K or even an employer-sponsored pension plan to fund their retirement. However, many will also likely find that they need more than one or two streams of income to live the life they want and achieve their retirement goals.
Other Income Sources
You’ve got Social Security, your 401K, maybe a pension from your employer. What other income streams are available to you in retirement?
Obviously, any investments you have in your portfolio will form part of your retirement income; after all, that’s what you’ve been saving for. Investment income can include stock dividends, bond interest, income from annuities. No matter what mix of products your portfolio contains, you should be leery of spending down more than a modest amount of your principal, which means you should also look at other income options.
Some people may have business or real estate investments generating rental income that can provide them with additional income during retirement. Perhaps you have a cottage or another property that you can make some money from, either by renting it or selling it. Or perhaps you’ve invested in a business, or even partnered up with another entrepreneur to create your own business that can provide additional income.
Perhaps most important, you shouldn’t rule out working part time in retirement if your health permits. Many retirees continue to work part-time during their retirement, both as a means to “keep active” in retirement and as a way of earning some extra income.
Matching Income with Expenses
When you develop a budget for your retirement, you should start by figuring out which are your essential and discretionary expenses. You should also account for all of your income sources. Once you have these numbers, the next step is a simple budget: add up your income, deduct taxes and then deduct your expenses. Whatever is left over is your savings.
Even affluent retirees frequently find that their after-tax income minus their expenses is a negative number—they don’t have enough income from multiple sources to cover all of their expenses. That’s where your investments come in. By using some of the growth of your investment portfolio to cover a small portion of your expenses and keeping a diversified portfolio of income streams, you can ensure that you have enough to cover your expenses and may be able to build your wealth in your retirement years.