Don’t end up with less income than you need in retirement
From: www.fool.com
When you’re young, and need more income, you might take on an extra job, get a raise at work, or switch to a better-paying job. But when you’re retired, those options may not be feasible. Still, retirees need ample income to survive for possibly two or three decades (or more), and Social Security alone is never going to provide as much as they need.
Here are five sources of income to consider for your retirement. See which ones make sense for you, and perhaps tuck one or two in the back of your mind for later.
1. Your Health Savings Account
If you have a high-deductible health insurance plan, you may be able to set up a Health Savings Account (HSA), which can help you pay for qualifying medical expenses on a pre-tax basis. That’s great, and it will save you money, but there’s even more to like about HSAs.
A key feature of the HSA is that, unlike its cousin, the Flexible Spending Account (FSA), the money put into it isn’t there on a use-it-or-lose-it basis. Whatever isn’t spent on those qualifying expenses gets to stay and grow. Better still, it can be invested in stocks, too.
But wait — there’s more! Once you turn 65, you can spend that money on anything. Any sums not spent on qualifying healthcare expenses will count as taxable income to you, just like withdrawals from a traditional IRA or 401(k) account. So an HSA account can serve as a good retirement savings account. Since retirees often face hefty healthcare expenses, you may end up spending much of the account on them anyway, saving on taxes in the process.
2. Dividends
You might not think of dividends as an unexpected income source in retirement, but there’s a good chance you’re not taking them seriously enough. You may just be expecting a few hundred dollars here and there, at most. That’s not how it has to be.
If you have a portfolio with a bunch of healthy and growing dividend-paying stocks in it, you may be able to set yourself up for an income stream that rivals Social Security. For example, with a $500,000 portfolio that has an overall dividend yield of 4%, you can expect to receive $20,000 per year in dividends alone. Even better, the income will arrive without your having to sell any shares. You can hang on to the shares, and ideally, they will grow in value. Great dividend-payers tend to increase their payouts over time, too.
For perspective, the average Social Security retirement benefit was recently $1,661 per month or about $20,000 per year.
3. Interest
Interest can be another powerful source of retirement income — just not right now, as interest rates have been extremely low for many years. But inflation has been on the upswing, and the Federal Reserve has signaled that increases are on the way. If you have $100,000 in short-term investments and you’re earning 1% interest on it these days, that’s $1,000 in interest income. It’s better than nothing, but it won’t go far in retirement.
Remember, though, that interest rates do fluctuate over time. Check out some historic prime rates in the table below:
| Date | Prime Rate |
|---|---|
| Aug. 1, 1948 | 2.00% |
| Jan. 22, 1958 | 4.00% |
| Dec. 18, 1968 | 6.75% |
| Dec. 3, 1973 | 9.75% |
| Dec. 26, 1978 | 11.75% |
| April 2, 1980 | 20.00% |
| Dec. 19, 1980 | 21.50% |
| Nov. 28, 1988 | 10.50% |
| July 2, 1992 | 6.00% |
| May 17, 2000 | 9.50% |
| June 27, 2003 | 4.00% |
| Dec. 13, 2005 | 7.25% |
| Oct. 29, 2008 | 4.00% |
| March 15, 2020 | 3.25% |
There are occasional periods when interest rates can be well into the double digits. If your $100,000 portfolio is earning 8% interest, that’s $8,000 in annual income to you — about $667 per month. That kind of income can go a long way toward paying for food, utilities, or travel in retirement. Depending on how high interest rates go in the coming years, interest may be an unexpected source of retirement income.
4. A side job
I noted that in retirement, you might not be up to a regular side job, such as being a cashier in a store. But there are some kinds of side jobs that you may be able to take on, at least for a few years, which can bring some meaningful income into your household.
For example, you may be able to give language or music lessons to kids or adults. If you charge $50 for a lesson and give six lessons per week, that’s $300 in extra income for the week — amounting to about $15,000 per year. You might make things to sell, such as sweaters or furniture, or you could take on some freelance work that you do at your computer such as writing, editing, or designing.
5. Your house
Your home may provide another unexpected income stream if you rent out space in it through services such as Airbnb or Expedia’s service VRBO. If you spend a week or several weeks at a time visiting friends or family, your home might be available to rent for several long stretches. Depending on the accommodations you can offer and your home’s location, you may be able to net around $100 to $200 per night or more, so renting out your space for 14 nights per year could generate $1,400 to $2,800 per year.
Depending on your circumstances, you might even take in a boarder for a while. If you charge $600 per month for a bedroom and kitchen privileges, you could generate $7,200 per year (pre-tax).
Another way to wring money out of your home is a reverse mortgage. It won’t work for everyone, and it doesn’t make sense for everyone, either. However, it’s a valuable solution for some retirees when more income is needed. It involves borrowing money using your home as collateral and receiving regular payments based on its value. The loan doesn’t have to be repaid until you no longer live in the home, such as when you die or move into a retirement home or care facility. There are various pros and cons to consider, so read up on reverse mortgages if you’re interested.
A little digging around online may turn up some more sources of income, but one or more of these five ideas could serve you well in the future.
