7 Sources of Retirement Income When On A Tight Budget
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Let’s face it. We all enjoy earning money. Without it, how can we possibly afford things and live comfortably?
Working enables us to have money roll into our bank accounts, and it is one of the things that satisfy our needs. But you can’t work ever, no matter how much you want.
When the time comes for you to retire, you’ll need to have an alternative source of income. You can’t merely rely on Social Security benefits as it typically isn’t sufficient. As early as now, you need to arrange and look for other ways to earn money so that you can ensure a well-funded and worry-free retirement.
So how exactly can you have a steady source of income throughout your retirement? Start planning your strategy based on these different income sources!
The Different Sources of Retirement Income
For some, retirement means having all the time in the world. You can now simply sit on your porch all day long while reading your favorite book and sipping a cup of tea. While this idea sounds promising, others worry about their retirement. Do they have the enough means to live a decent lifestyle? Do they have the right sources of income so they can still buy their basic needs.
Below are the different sources of retirement income that you should know.
Retirement Savings Account
Most retirees who worked for a particular company have access to a sponsored retirement account, also known as a 401(k) or IRA plan. However, the amount you will receive depends on your contributions during your employment. So make sure that this is well-funded and make regular payments for your IRA.
Tax-deferred savings accounts will be taxed, although distributions from Roth accounts are tax-free. You might want to consider getting the latter so you can reduce your taxes when you get older.
If you are self-employed or you run your own business, you can still make contributions to a tax-deferred retirement account. For your case, you have the option to open a traditional IRA or a Roth account as well.
Real Estate Investments
Instead of buying shares of real estate investment trusts, you can become an owner instead and escape being in the middle!
Some retirees hire someone to manage and maintain the property, but the fees can be very costly. Thus leading the real estate yourself can be time-consuming and tiring, but you can surely get more out of your investment.
However, there’s still a risk of investing in real estate. You have to make sure to buy properties that you can afford, and not significant, extravagant investments. Being careful with your finances can help you avoid cash flow problems in the future.
One way to address these risks is to partner with other investors, so you don’t have to put out too much money. You can also work with prominent real estate partnerships to help diversify your properties, and they can also help you to have the capital to do so.
Typically when you have worked for a particular company for an average of five years, you may be eligible to claim pension benefits. The longer you have worked, the higher the amount of pension you’ll receive.
This is one of the easiest and convenient ways to have retirement income because you are guaranteed to get an amount of money as soon as you leave work.
You can also consider a reverse mortgage in getting a retirement income. This for those who are at least 62 years old and live on a fixed, steady income.
Reverse mortgages are commonly known as home equity conversion mortgages, which allows you to convert your home equity to a loan. You have the option to get the proceeds as an upfront payment, installment of fees, or a line of credit.
What’s excellent about reverse mortgages is you don’t have to pay income tax on the money you’ll receive simply because it’s a loan.
On the other hand, they can be tricky. Once you take a reverse mortgage, the debt grows with each payment you receive. It should be repaid when you move out for your home or in the event of your death. This can be done by selling the property.
Another source of retirement income is buying an immediate annuity. Many retirees use the money they have saved to purchase an immediate annuity since the income stream is predictable and often unaffected by stock prices and declining interest rates.
An immediate annuity is like purchasing your own person. You pay a large amount of money to an insurance company, and they will give you continuous payments for the rest of your life.
The only downside of this is once you buy an immediate annuity, you can no longer take it back, and the payment that will be given to you will never increase. The principal amount that you paid is locked in forever, and the insurance company gets to keep the remaining balance in your account.
Immediate annuities are complex, and they come in many forms. Before you buy one, make sure you choose the right one. Do some research first so you can understand the technicalities behind it. Read more about annuities here.
Retirement is meant to be spent stress-fee, but for some retirees, doing part-time work is still an option. This option is best for those who want to do light work and be productive during their retirement, as it also gives retirees a sense of satisfaction and accomplishment.
For instance, you can turn your hobbies to a side job for extra income. Whether it’s writing, baking, or even gardening – you can always use your skills to earn a few extra bucks.
Out of all the many sources of retirement income, Social Security is the most vital. Your Social Security benefits are more secure than other channels of income, as it can be adjusted periodically for inflation.
A crucial choice you have to make about your Social Security is when you apply for your benefits. You have the option to get your reduced benefits at 62, which is the minimum age, or you can wait until you are finally eligible to take full benefits. This will depend on your year of birth.
Although, many financial advisers recommend waiting until you are qualified to receive full benefits.
If this is still unclear to you, the Social Security Administration can provide you resources to help you better understand the benefits you can receive. You can explore the following topics so you can plan ahead for your retirement.
- Find Your Full Retirement Age
- Social Security Retirement Planner
- When to Start Receiving Retirement Benefits
- Life Expectancy Calculator
Eligibility and Benefits
If you and your spouse are both eligible for Social Security benefits based on your work histories, you’ll face a critical choice. You must decide together whether to draw on your accounts or have one of you draw what is called spousal benefits.
If you and your spouse earned approximately equal amounts over your working lives, drawing on your individual accounts will provide the greatest benefits. But if one of you made substantially more than the other, you’ll want to compare your alternatives.
For example, if you are qualified for your own retirement benefit and a spousal benefit, the SSA will give you your benefits based on your record. However, if the benefit as a spouse is higher than your retirement benefit, you will receive a combination of benefits equaling the higher spouse’s benefits instead.
You are also eligible for additional Social Security benefits if you have a minor child by the time of your retirement.
These are the different ways that prove you don’t need to have an extravagant amount of money to have a passive source of income. You can start now while you’re still young, having a side hustle or two will make you even more productive. You can also earn cash while you’re at it! Learn more about what passive income is and how you can start earning it, click here.
Can Social Security Benefits Affect my Other Sources of Income?
Don’t worry, your other sources of income won’t affect the benefits you’ll receive from Social Security. Luckily, they do not count your investment seven if the net profit from these is higher than your salary. Read this if you want to know more about the relationship between passive income and social security benefits.
Retirement shouldn’t stop you from earning money. Having a stable source of income as you grow older is possible, but it takes preparation. You have to save money regularly, invest in the right platforms, and determine the best payout options when it’s time to draw out your funds.
Now keep in mind that retirement income shouldn’t be limited to a single source only. For most people, cash flow can be acquired through a combination of multiple channels such as a pension, social security benefits, real estate, inheritance, and other investments. It’s better to rely on different sources than to have a single one to earn from. This can help you safeguard your earnings if interest rates fall or if one of your other investments delivers failed returns.
If you want to learn more about the different sources of retirement income, you may read How To Make Your Money Last: The Indispensable Retirement Guide by Jane Bryant Quinn.