Is there any site more majestic than the Mississippi River flowing past New Orleans to the Gulf of Mexico? You can see why Native Americans called it “Father of Waters.” It rolls on big, slow and steady, fed by 10 rivers and 7,000 streams from Minnesota to Louisiana.
There’s a lesson here for retirement planning. The best-funded retirements are often nurtured by tributaries – streams of income that flow into the main river of retirement savings, providing growth, insulation from market turmoil and, in some cases, non-financial benefits.
Here are some common sources of retirement income. Every person’s river looks different. Depending on your goals and circumstances, some of these sources will be rivers, others just a trickling stream.
Income investing. For most of your working career, your investment portfolio should be focused on growth stocks, shares that are expected to steadily increase in value over the years. But as you near retirement, you should consider shifting your emphasis to interest-yielding assets, including stocks that pay regular dividends, and bonds, which pay interest. Other options include REITs, which are publicly traded baskets of real estate holdings, preferred stock, and Master Limited Partnerships, which pay you’re a share of the royalties on the use of energy storage and transportation facilities.
While you are still working, income from these assets can be used to fatten your nest egg. When you retire, it can be redirected into your wallet.
Social Security. First off, let me assure you – yes, Social Security will be there when you retire, especially if you are in your 40’s. The size of this tributary depends, in large part, on when you open the floodgates. You can start receiving Social Security benefits as early as age 62. But if you do so, your check will forever be 30% less than if you had waited until your full retirement age, which occurs sometime between age 66 and 67, depending on what year you were born. And, if you take a job in retirement before you reach full retirement age, your benefits could be suspended or reduced.
Your potential monthly benefit will grow about 8% every year that you don’t take Social Security until age 70, when it plateaus. That doesn’t mean everyone should hold off until they are 70. Any number of factors will influence this decision. Bottom line: Take your benefit when you truly need it to meet your specific needs.
Part-time work. I’m a huge advocate of this one, especially in the years immediately following retirement. A part-time job can provide difference-making money, even if you only work 10-15 hours per week, or take on just one consulting client. What’s more, working a few hours can provide structure, social contact and a sense of purpose, all of which are important to a happy retirement. Look for a job that feeds your passions. If you love baseball, get a job at the local stadium. If you’re into arts and crafts, maybe Michael’s could use you.
Remember what we talked about earlier – If you accept Social Security before your full retirement age (sometime after your 66 birthday) a part-time job could result in a reduction or suspension of your benefits depending on how much you earn.
Rental property. Leasing out one or more residential or commercial properties could generate a steady stream of income, if you are willing to take on the mundane chores and occasional woes of being a landlord.
If you plan to significantly downsize in retirement, or move to the nearby beach or mountains, perhaps you could rent your current suburban home instead of selling it. Or, if you’ve fully funded your retirement accounts, perhaps you should consider using your additional savings to buy a rental property or two.
Of course, there is no sure thing in real estate. Do your homework before jumping into the rental game. And think carefully about how much of your post-career life you want to spend tending to such assets. One option is to hire a management company. This will reduce your headaches, but also diminish your returns.
Pensions. Once a staple of retirement funding, pensions are now largely limited to the public sector, where the life-long payments help offset the relatively low salaries paid to teachers, firefighters and police officers. If you have changed jobs several times in your career it might be worth checking to see if you have any pension benefits coming your way. It might be just a few dollars a month, but every drop matters to the river, right?
Use this list to map your retirement income river and maximize its flow. Tapping and maximizing these sources could swell your retirement resources, allowing you to serenely float through post-career life and towards your dreams, like Huck Finn rafting down the Mighty Miss.