Everyone has their own idea of the perfect retirement. Many dream of traveling the world or spending more time with family. And a comfortable retirement depends upon having sufficient income. There’s no one-size-fits-all when it comes to the best retirement income streams.
The Best Retirement Income Streams
Pensions are not as common as a retirement income stream as they once were. As of March 2020, only 15% of private industry workers had access to a defined benefit plan. The formal term for pensions. Of those, 12% had access to a defined benefit and defined contribution plan. The latter refers to employer-sponsored retirement plans such as a 401(k). That means just 3% of those in the private sector are relying on pensions for retirement. In contrast, 67% of private industry workers had access to defined contribution plans.
On the other hand, those working in the public sector can still count on pension benefits. 94% of full-time state and local public employees had access to defined benefit plans. If you do receive a pension, it is likely a major source of retirement income. It’s consistent and very dependable. Lenders will provide loans to retirees based on pension income. Such loans can help you build other retirement income streams. This includes taking out a mortgage on a house you intend to rent out.
Retirees wanting the best retirement income streams often turn to annuities. Think of annuities as a do-it-yourself pension. They are insurance contracts marketed by financial institutions.
Insurance companies are the primary providers of annuities. They are also available through banks, brokerage firms, financial advisors and independent brokers. Companies issuing annuities are not federally guaranteed. However, they are subject to regulation by state-guaranteed associations.
There are various annuity products available. For example, an income annuity allows you to convert retirement savings into a lifelong guaranteed income stream. You don’t have to worry about outliving this income source. Explore different annuity options and make sure you read and review your contract thoroughly.
Purchase an annuity in either a lump sum or via flexible payments. After purchasing the annuity, or premium, you can opt for checks on a regular basis. Choose to receive money monthly, quarterly, semi-annually or annually. You will want to choose whatever best suits your needs.
Since the annuity is guaranteed by the company issuing it, make sure to check the company’s ratings. You can do this from top independent rating agencies monitoring the strength of insurance companies. These agencies include A.M. Best, Fitch, Moody’s and Standard & Poor’s.
Laddered Certificates of Deposit
Retirees often choose certificates of deposits (CDs) as one of the best retirement income streams. They choose this because of its low risk level. CDs have paid little in interest in recent years. However, they are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. That’s per depositor, per FDIC-insured bank, per ownership category. CD safety appeals to many retirees. However, inflation rates may exceed CD interest rates, resulting in an overall loss of buying power.
Maximize interest by laddering your CDs. Start a CD ladder by taking an initial amount of cash and dividing it among several CDs maturing at different times. Taking into account that CDs with longer maturity generally pay higher interest, you can opt for CDs maturing in six months, 12 months, 18 months or longer. The idea is that each CD matures at a later date than its predecessor.
When a CD matures, you can cash it in if you need the money. Otherwise, roll it into a longer-term CD.
That’s how to build rungs on your ladder. Laddering gives you the best of both worlds. The goal is obtaining the higher interest offered by long-term CDs. However, you have the option to liquidate short-term CDs as they mature if funds are needed.
You can also structure the ladder so that you receive the interest upon CD maturation. To do that, make sure the CD does not include automatic reinvestment. That’s fine for some types of saving. However, it’s not fine for generating the best retirement income stream based on interest.
Income Producing Property
It’s true that many retires depending on rental income were hit hard by the CDC’s eviction ban during the pandemic. Not only did many tenants withhold rent, but landlords still had to pay property taxes and make mortgage payments. However, this Black Swan event shouldn’t deter those considering purchasing a rental property looking for the best retirement income streams.
Other options for those interested in real estate investing for retirement include downsizing. And you will want to do this by holding a mortgage for the buyer of your previous home. If you own your current home free and clear, seller financing can give you a steady income stream. It is possible for you to hold title to the property until the loan is paid off. If the buyer stops making payments, you can sell the house.
Maximizing Social Security
Social Security is part of most retirees’ income stream. Anyone born before 1955 is already entitled to full Social Security benefits, having reached age 66. From 1955 to 1960, full retirement benefits increase gradually until reaching 67. Full retirement is 67 for those born after 1960. While it is possible to take benefits starting at 62, the monthly amounts will decrease substantially compared to waiting until full retirement kicks in.
Keep in mind that Social Security benefits increase every month that filing is delayed until age 70. Delay retiring for a few years, and you’ll do more than increase your Social Security benefits. You’ll also lower the length of time your retirement savings must last.
Best Retirement Income Streams: Working in Retirement
Complete retirement isn’t for everyone. Many people enjoy working, they just don’t want to do it full-time. Part-time work creates additional income while allowing ample time to relax and enjoy life.
There’s another plus when it comes to working part-time. You can continue contributing to a traditional or Roth IRA. If you are not covered by a 401(K) or similar employer-sponsored retirement plan, your contributions to a traditional IRA are tax-deductible. While contributions to a Roth IRA are not tax-deductible, you do not pay taxes upon withdrawal. Unlike a traditional IRA or employer-sponsored plan, there are no Required Minimum Distributions with a Roth IRA.
Perhaps retirement is the time to open your own business. If that’s the case, set up a SEP-IRA. Contribute up to 25 percent of your net earnings from self-employment. For 2022, the maximum SEP-IRA contribution is $61,000.
Income Stream Diversification
The best retirement income streams for your needs involve diversification. During the years you were building your nest egg, you knew it was unwise to put that egg into one basket. The same holds true in retirement. When you have several sources of income in retirement, that diversification principle offers protection should one stream experience a downturn.
About Jane Meggitt
Jane Meggitt specializes in writing about personal finance. Besides investing and planning for retirement, she writes about insurance, real estate, credit cards, estate planning and more. Her work has appeared in dozens of publications, including Financial Advisor, Zack’s, SF Gate and Investor Junkie. A graduate of New York University, Jane lives on a small farm in New Jersey horse country.