Friday, December 18, 2015

7 Sources of Retirement Income

They did it!  The Federal Reserve made good on their promise and raised the Fed funds rate by a quarter percent this week.  For all of you with adjustable rate anything, be it credit cards, car loans, a mortgage, it is now time to put the debt to sleep or lock down a fixed rate.  It's only going to get worse for anyone borrowing money, and just a tiny bit better for savers looking to get better rates on CD's and money market accounts.

Who knows what 10-year T-notes will do.  Maybe now they'll start heading the other direction and provide risk-averse investors better returns.  Rock bottom Treasury rates have punished retirees needing income for many years now.  It now takes a cool mil to get 50% of your income from safe yield.  See: You Need $1M to Retire...  Where will the other 50% of your pre-retirement income come from?  That's what this post is all about.  So let's begin.

1.  Risky paper assets.  If your portfolio is entirely in securities as you build your nest egg throughout your career, then you won't have many alternatives for income other than paid dividends or liquidating your holdings periodically.  You'll also have to pray the market doesn't tank in a major way until after you die.

2.  Safe paper assets.  All sorts of bonds are available and do provide steady, reliable income during retirement.  Of course, you'll need to do more of your homework if you shoot for higher yield and decide to purchase anything outside the realm of US Treasuries, e.g., munis, junk bonds, etc.  How about a CD?  Certificates of Depreciation...ooops, I meant, Deposit...are loved by the general public because they are super safe.  If you're going to put your money in CD's, at least buy more than one with your money, and stagger them in increments of three to twelve months.  Known as a CD ladder, by investing your money in equal amounts in more than one CD with different maturity dates, you'll reduce both interest rate and re-investment risk.  Meaning, you may just lock in a better rate in a CD you buy down the line, AND, when it comes time to re-invest, you may decide it's okay because you have other money becoming available to you in the near future from an older CD.  

3.  Annuities.  With an annuity you can have a fixed sum of money paid to you each month after retirement.  You can build your annuity tax deferred throughout your career as I am currently doing with my 403b (some people have a 457b which is similar).  Or you can purchase an annuity after retirement.  Your choices will include both a fixed rate or a variable rate (invested in securities). can even buy a deferred annuity and not collect any monthly dough until you're in your seventies.  Meanwhile your money grows.

4.  Cash value.  Have a whole life insurance policy?  I do.  If I were to die today, my family would get about $75K from this policy.  I do have other coverage, but what I like about this one is that as I pay my premiums, I am building a fund that has a surrender cash value each year.  Of course, the big bucks won't be available until 30 years of paying $70 (my current payment) per month.  I won't break even until year 35 or something.  Still, when I decide to stop paying, I'll have another stream of income in retirement!

5.  Rents!  Rental income is my personal favorite.  I've bought three out-of-state rental properties this decade and when I retire, I'll be mostly done paying off these mortgages.  If they don't change the tax code, I'll be able to continue to write off expenses and that is a good thing because I'll have all sorts of streams of retirement income coming in.

6.  Roth IRAs.  At 59.5, I'll be able to tap into my Roth IRA without Uncle Sam taking any of my money.  This is why I am a strong proponent of Roths as opposed to Traditional IRAs.  So if you can do it, get yourself one!  I invest within my Roth IRA and every dollar I make on top of what money I have contributed will also be tax free once I leave the rat race.  You can't beat that.

7.  401ks, Traditional IRAs, DB or DC pensions.  I think everyone is familiar with these so I'll just move along.

The name of the game in retirement is income.  How will you make money when you're not working?  That is the dilemma everyone will have unless they decide to work until they kick the bucket.  That is why there is no better day like the present to start building yourself a diverse collection of retirement funds.  With compound interest at work for you, you'll be surprised at how a little money saved each month turns into a whole lot of money twenty plus years in the future.  So start now!

Until next time.  Thanks for reading.

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