Retirement income strategy: A guide to investing in your future
It’s never too early to start planning for your future. With a strong retirement income strategy, you can be confident that you will have enough finances to secure a comfortable retirement. Read on to learn how to create a retirement income strategy and learn what your retirement income goal should be.
If you’re like the rest of us, you hope for a comfortable retirement.
According to 2016 data from the U.S. Bureau of Labor Statistics, the average annual American retirement income was $48,000 and the average expenditure for necessities like food is close to $46,000.
How does just $2,000 of spare income a year sound to you?
It is never too early to start thinking about your retirement income strategy so you can retire with as much in the bank as possible and start making yourself a comfier life.
How does retirement income work?
Typically, retirement income comes from the money you put away during your working years. When you invest this money in reliable sources, it will grow over time and increase in value when you hit retirement.
Nonetheless, many Americans rely on Social Security as their primary form of retirement income.
Social Security is a federally run insurance program that provides retirees with retirement income.
The average monthly Social Security benefit for a retired worker comes to around $1,413, or just under $17,000 a year.
Although it is possible to survive on Social Security alone, it’s not enough to maintain a comfortable lifestyle, let alone thrive in most parts of the US.
For this reason, we recommend creating a retirement income strategy that does not rely on Social Security alone.
Where does retirement income come from?
Unlike regular income, retirement income usually comes from investments. Some people continue to work in some capacity in their retirement, but for many, retirement is a time of relaxation or at least a time of less work.
A successful retirement income strategy involves curating different sources of income so that if one dries up, you have other dependable sources to rely on.
Taking it further, the retirement income strategy is one where your money continues to grow even in your retirement.
Sources of income in retirement
There are a wide variety of options available when it comes to investing in your retirement. The best retirement income strategy is one that relies on multiple sources rather than one or two investments.
Here are some of the most popular sources of income in retirement.
Despite declining interest rates, about 20% of Americans expect to rely on their FDIC-insured savings accounts when they retire. This is money that they have personally saved up in preparation for their later years.
Unfortunately, savings accounts today offer dismal interest rates with the U.S. average sitting at just 0.06%. When you compare this with the 2% inflation rate, the real value of these savings can be expected to decline by 10-20% each decade.
If you want to earn in retirement, you should not be relying on your savings account.
2. Social Security
Social Security is a major source of retirement income for most Americans. 40% of Americans rely solely on Social Security for retirement income.
Social Security is a federally run “pay-as-you-go” program that people contribute to during their working years. The money that is paid in by workers and used to fund current retirees.
By paying Social Security taxes, you automatically become eligible to receive Social Security when you retire.
As mentioned earlier, the annual Social Security benefit with each retired worker comes to just under $17,000.
This is enough to survive, but leaves little to no spending money, especially for Americans that are still renting or paying off their mortgage.
3. Retirement accounts
Around 42% of Americans expect to rely on retirement accounts such as 401(k)s and IRAs to fund their retirement.
An IRA is a tax-free account allowing individuals to save for retirement through a long-term managed investment account. As these accounts are for retirement, there’s typically a penalty for early withdrawals.
Declining interest rates make retirement accounts a less reliable retirement income strategy than they would have been in previous years when interest rates were significantly higher.
However, they are still a decent choice for safe returns on your savings.
4. Home equity
While the value of your savings can be expected to predictably decline over time, the opposite can be said of the value of your home.
Tapping into your home equity can help you finance retirement in many ways. For example, selling your home and downsizing can be a great source of retirement income.
Alternatively, taking out a reverse mortgage allows you to borrow against the value of your home. Instead of paying money into your mortgage, you can borrow money from the lender.
Although depending on home equity can be a reliable retirement income strategy, it does potentially involve giving up ownership of your home.
If you publish a book, write a song, or create a course in your lifetime, the royalties will continue to roll in each year of your retirement.
While these earnings are likely not going to be huge, it has become easier to publish online than ever before. Get something out there, you may be surprised at your returns.
6. Investment portfolio
Investment portfolios cover a range of assets like stocks, bonds, real estate – even commodities like art and wine.
A strong investment portfolio is comprised of a diverse spread of low and medium-risk investments. This means any higher-risk investments like stocks are mitigated by more dependable investments, like Treasury bonds (T-bonds), for example.
Pensions are still one of the key sources of retirement income in the U.S. A pension plan is a retirement income strategy that operates on a pay-as-you-go basis. Employers and employees pay into a public pension fund via social security taxes.
Private pension plans typically require the employer to pay 1% for each year you have worked times your average salary in the final five years of employment. While they used to be common, in the US fewer and fewer workers are benefiting from pensions than ever before.
8. Alternative investment income
In recent years, new options have developed allowing investors to combat declining interest rates without the high levels of risk associated with traditional investments like stocks.
P2P lending, for example, allows investors to lend money to borrowers at fixed terms with fixed interest.
When you incorporate P2P lending into your retirement income strategy, you can make sure the value of your savings increases over time, rather than decline.
What’s considered a good retirement income?
As mentioned earlier, the average retirement income in the United States is around $48,000 (before tax) per year. After spendings, most retirees have around $2,000 leftover.
While this is the average retirement income for the nation, it naturally varies a bit depending on what state you’re in.
For example, the average retirement income will not be sufficient if you are living in a more expensive state like New York or Hawaii.
For more information on the average retirement income in the US check out our blog.
What should my retirement income goal be?
Generally, financial experts tend to agree that your retirement income should be equivalent to approximately 80% of your salary in the final years before you retire.
Your income goal should take into account what your outgoings will be in retirement and take the rate of inflation into account. Outgoings include everything from household bills and your weekly grocery run to holiday gifts and vacations.
As we have seen, it is likely that Social Security alone will not cover these outgoings. With interest rates on savings accounts declining, we recommend looking into alternative investments as part of your retirement income strategy.
However you choose to prepare, it is important to start investing in your retirement fund now.
To work out your individual retirement income goal, think about what you would like your salary to be in the final years of your career and calculate 80% of this.
Start investing in your future now. Add MyConstant to your retirement income strategy
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