With over 10,000 Americans turning 65 every day, the question of how to pay bills during retirement is on the minds of many. I have almost daily conversations with individuals planning for their next stage of life and surprisingly, while each situation is unique, the choices all dovetail into the same five ways that cash flow can be generated to pay for a desired lifestyle. And when I emphasize that these five are the most reliable ways to generate retirement income, they often look at me quizzically and express concern that these choices are too limited. Yes, I remind them, there really isn’t a retirement income fairy.
Here are the five most reliable ways cash flow can be generated in your later years:
Inheritance and Gifts. For most Americans, receiving sizable financial gifts or inheritance is not the norm. Furthermore, in order for these to make a significant dent in your retirement cash flow needs, the amounts would have to be well into the six-figures. For example, if you retire at age 65 and live until age 90, a $100,000 inheritance could pay out about $10,000 per year for (only) ten years plus some interest. So unless your Aunt Margaret is very wealthy and you are one of her only beneficiaries, this shouldn’t be the only strategy you rely on.
Continue Working. This is an increasingly popular choice for a variety of reasons. For some, it is a necessity. For others, it is due to a desire to stay relevant, active, or mentally sharp. And for others, it is a time to get closer to a passion such as being a substitute teacher, an artist, or working for a charity. Working into what would otherwise be retirement is a perfectly fine choice. As a financial advisor, I often advise that this will be more optimal if the work is borne out of choice and not of necessity. So plan accordingly and stay healthy if this is your strategy.
Social Security. I am hearing more cynicism about the future solvency of social security – especially from younger people. I find educated Millennials to be quite savvy at financial planning and many are rightfully concerned about social security. Given the current political winds out of Washington, it is not unreasonable to assume that benefits will be either ‘means-tested’ (reduced for higher earners or the wealthy – whatever that definition is deemed to be), or heavily taxed. However, for those near retirement, I don’t expect reductions in benefits for the middle class or those at lower income levels. As a result, social security will remain a mainstay for the vast majority of Americans.
Pensions. A pension is an annual obligation of your employer to pay you income for life-based on a blended formula of income and years of service. Very few private companies offer pensions, and they reserve the right to freeze the plans and stop increasing benefits. There is also the risk that the Company goes bankrupt, and your pension, even if insured by the Pension Benefit Guarantee Corporation (PBGC), may only payout a fraction of the promised amount. There are many reasons for the decline in pensions (longer life expectancy, costs, regulations, global competition, etc.), but for those who are fortunate to still be eligible for a pension, it is very comforting and valuable. This is why public sector workers fight aggressively to keep these benefits. For now at least, pensions are somewhat common at the state and local level, but as America ages, these may also become less prevalent.
Personal Investments. If you are not expecting a sizable inheritance, are not eligible for a pension, and do not want to work or will be unable to work, then you are left with social security and your savings as your sources of income. This is why it is so important to save as early in life as possible in order to grow and accumulate your own pool of retirement assets. Actually, if you don’t save and social security is your only source of income, you may qualify for government assistance, but I rarely see people excited about this possibility. Therefore you are left with saving money during your working years in order to have personal funds to withdraw later in life.
I wish there were another way for people to have financial freedom, but unfortunately, regular saving, no matter how difficult the circumstances, is usually the best way to accumulate money and grow wealth. I understand the challenge millions of Americans face each day. At the same time, starting early and saving even a small amount can make a big difference later.