Planning for your retirement might seem like a daunting task, but with careful planning and lifestyle changes, you can build a nest egg that will cover your living expenses for life.
What is a Retirement Income, and How Much Should I Have For It?
While the ideal retirement income depends on a myriad of factors, most financial experts recommend that it should be at least 80% of your current salary. To put this in perspective, if you earn $100,000 annually, you will need around $80,000 per year to cover your post-work living expenses.
With the 80% benchmark mentioned above, it clearly shows that your Social Security income–which on average is pegged at $1,413 per month–will not be enough to cover your living expenses should you decide to leave the workforce for good.
To build a reliable retirement nest egg, Social Security should not be your only source of income. Savings, pensions, and passive income, such as dividend-paying equities and/or bonds, should also be part of your diversified income streams.
Troubling Statistics
A 2020 survey has shown that around 40% of people aged 60 years and older received retirement income through Social Security alone. This is a disconcerting number since the members, on average, just received $1,413 monthly or around $17,000 per year,
Take note that the $17,000 Social Security average annual income is a far cry from the $46,000 average living expenses of retirees, according to 2016 data released by the US Bureau of Labor Statistics.
Sources of Retirement Income
Arguably, the most traditional retirement advice is to beef up these three income sources: Social Security, pensions, and savings. However, this no longer holds true due to the rising cost of healthcare, inflation, and longer life expectancy.
To ensure a comfortable retirement, it makes sense to have multiple streams of income, which are explained below.
Savings
Saving, which is basically an income not spent, is the first step to building your emergency fund and growing your investment. However, financial experts strongly agree that saving alone is not enough.
Inflation can reduce the value of your savings over time, even after taking into account the paltry interest rate you earn from a savings account. Nevertheless, about 20% of US retirees rely on this to cover their living expenses.
Social Security
As of this writing, the maximum Social Security monthly income is $3,895 for a person who files at the age of 70; $ 3,113 for someone at full retirement age (66 years and two months), and $2,324 for someone aged 62.
Even with the maximum amount, the income barely covers the living expenses of an average retired individual. Thus, your retirement nest egg should have other streams of income if you want a comfortable life.
Retirement accounts
Recent statistics show that about 42% of US retirees have 401K and IRAs as part of their income streams.
To allow these retirement accounts to work in your favor, avoid making withdrawals before the age of 59 years and six months as doing so comes with a hefty 10% penalty on the amount of money you pull out, plus you have to pay federal income tax.
Home equity
If you are a retired empty-nester, downsizing to a smaller house might be a good way to reduce your monthly expenses. This is particularly if your rent eats up a large portion of your income.
You can also tap a reverse mortgage, which is a type of mortgage loan that allows homeowners to borrow money based on the unencumbered value of their property. Meanwhile, you either receive this fund in a lump sum or monthly payments.
Reverse mortgage loans don’t require monthly payments, but they become due and payable when the borrower dies or sells the home.
Royalties
If you are a creative content creator, e.g., a songwriter or book author–royalties can be a great source of passive income. However, you must realize that they are taxable income like any other form of payment in business.
Investment Portfolios
While investment doesn’t have any age limit, seniors tend to have a lower risk appetite than most fully employed people in their prime years. Hence, you might want to be conservative and stick to blue chip companies (i.e., publicly listed, financially sound firms), government bonds, and real estate investment trusts or REITs.
Worker’s Pension Payment
This retirement income is determined by the length of your employment and the amount of annual income you earned. In this plan, both you and your employer make contributions.
Alternative Investment Income
Peer-to-peer or P2P lending is a good alternative to traditional investment portfolios. In this setup, you act as an investor by lending your money to people at a fixed interest rate.
But as with any investment, it comes with a risk such as late debt payments, loan default, and bankruptcy of the P2P platform itself.
Final Words
With smart investment, careful planning, and lifestyle changes (especially living within the means part), you can build a nest egg that will give you a comfortable and secure post-work life.
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For more information, send us a message and start investing today!
