Financial Educators. Financial Advisors.

Is Your Retirement Plan Well-Rounded? 5 Ideas to Generate Income for the Best Season of Your Life

September 17, 2020

A retirement plan and savings plan look different today than they did just a few decades ago. Financial planners once advised their clients to think of their retirement income as a three-legged stool supported by social security, an employee pension, and their personal savings. But in recent years, that old stool has begun to look a bit wobbly. The result is that retirees are less secure and far less able to enjoy their retirement to the fullest.

According to the National Institute on Retirement Security, only 6.8 percent of today’s retirees receive income from all three sources. This is partly because the traditionally defined benefit pension plan has been on the decline for the past 25 years and most people approaching retirement don’t have enough savings. Today, 40 percent of retirees rely on Social Security alone.

Unfortunately, many Gen Xers and Baby Boomers will fall well short of their retirement goals, but you don’t have to. Even if you don’t have an employee pension or as much savings as you’d like, you can still create a well-rounded retirement plan.

Here are a few ideas for generating retirement income so you can enjoy the next phase of your life worry-free:

1. Open a Roth IRA.

While many companies now offer employees a defined contribution plan such as a 401(k), this isn’t the only way to save for retirement. You can also make yearly contributions to a Roth IRA — even if you have a 401(k) already.

The main difference between a Roth IRA and a 401(k) plan is that a 401(k) is funded with pretax dollars, so you’ll pay taxes on any funds you withdraw after the age of 59½. Roth IRA contributions are made after taxes, so you can continue to grow your money tax-free.

Another advantage of a Roth IRA is that it doesn’t have any required minimum distributions like a traditional IRA. Although a Roth doesn’t come with any matching benefit your employer may provide, you can contribute to your Roth IRA well past retirement if you or your spouse is still earning taxable income.

2. Consider assets you could sell or lease.

Just because you don’t have a large savings account balance doesn’t mean you don’t have assets. Many retirees have physical assets that can be turned into retirement income. If you aren’t up-to-date on real-estate prices in your area, you might be shocked to learn what your home is worth. If you’re thinking of downsizing or relocating, selling your home could help you reach your retirement goals.

Other property you own can be turned into income-generating assets as well. Farmland leased for planting or grazing can provide a reliable stream of income without much continual effort on your part. Check with the USDA to see the most current per-acre cash rental rates in your county.

3. Investing in a rental property as a retirement plan.

Rental properties are another great way to generate extra retirement income — especially if you have equity in your home that you’re willing to reinvest. If you own a second home, you could consider making it a short-term rental through a site like Airbnb or VRBO for those times when you aren’t using it. If you don’t want the hassle of managing a short-term rental, there are services that will manage your property for a percentage of the earnings.

Another option for investing in real estate without owning physical property is a real estate investment trust or REIT. A REIT is a company that invests in revenue-generating real estate such as apartments, hotels, and office buildings. REITs pay dividends to their investors, and buying stock in one is similar to investing in a mutual fund.

4. Look for stocks that pay dividends.

As people approach retirement, many look to shift their investment portfolio to a combination of low-risk, low-yield investments that include bonds and CDs. Using these investments as part of your retirement plan helps protect your money from the swings of the market, but they aren’t ideal for generating income to help you meet your retirement goals.

In the past 15 years, the Bloomberg Barclays US Aggregate Bond Index had an annual return of just 4.25 percent. Meanwhile, many blue-chip stocks pay dividends that far outpace the return on bonds. A lot of these companies are names you’re familiar with, such as Exxon Mobil, Chevron Corp, and IBM. Retirees with a sizable investment portfolio may find dividend-paying stocks are a great way to supplement or even replace their income.

5. Start a home-based business as part of your Retirement Plan.

In the years leading up to retirement, many people begin to fantasize about having a life. A life that gives them the time to do all the activities they enjoy. They picture themselves fly fishing, traveling the country, or spending time with their grandchildren.

But today’s retirees are living longer than their parents or grandparents did. Many find that they still have all the energy they had before retirement and no place to put it. According to one British study, the average retiree is bored within a year of retirement, and most felt that working part-time would give them a greater purpose in life.

Opening a small home-based business is a terrific, low-risk way to generate extra income. You will also meet new people, and retain the sense of purpose and excitement you enjoyed pre-retirement. Being your own boss also gives you the freedom and flexibility to do the activities you enjoy. Consulting, teaching lessons, or selling handmade items are all new avenues to explore the things that interest you.

The three-legged stool approach to retirement may be disappearing. Well, that doesn’t mean your retirement plan can’t be stable enough. You could still have the peace of mind and comfort you desire. Want to learn more? Set up a call to discuss your retirement goals and learn about our financial planning services.