It is important to have a plan and to plan thoroughly.
Impact of government shutdown on social security
Here’s what you need to know about Social Security payments during the ongoing government shutdown.
Sadly, for most of us, Social Security benefits will provide much less income in retirement than we need or want. In fact, as of August, the average Social Security retirement benefit was just $2,008 per month, or about $24,000 per year. Even if you raised twice that amount, $4,016, it would only be about $48,000 a year.
So what should I do? Well, there are a few things. Learn how to prepare for a more financially secure and comfortable retirement.
What are your retirement plans?
Each of us needs to take the time to develop a solid retirement plan. To do this, you need to think about how much income you will need and how you will get it. When thinking about how much your retirement savings will be, think about the following categories:
- Housing – rent, mortgage payments, etc.
- Food – both groceries and eating out
- clothing
- trip
- public works
- tax
- Insurance (life, housing, automobile, pet, nursing care, etc.)
- entertainment
- transportation
- health care
- Repair and maintenance
- membership
- fuel
- pet
- debt repayment
- gift
- Donation
- emergency situation
Add up how much you expect each to cost per year and add them up. We recommend doing this in a spreadsheet, as the total can change from year to year due to inflation.
For example, to keep things simple, let’s say you want to retire with $100,000 in retirement benefits in your first year. If the inflation rate is around 3% as it has been in the past, you would need around $103,000 in the second year and $106,090 in the second year. (To do this calculation, multiply each required year’s income by 1.03 to adjust for the following year’s 3% inflation.)
To be more conservative, you can also plan for larger annual increases. To be as accurate as possible, you can also consider specific categories and how much each category grows over time. For example, from early 2020 to mid-2024, transportation costs (including gas) increased by 27%, healthcare by 10%, and apparel by 7%, according to the U.S. Bureau of Statistics.
Spending on different categories also changes over time. For example, you may not spend much on health care costs in the early years of retirement, but those expenses can add up later in life. Similarly, spending on travel and transportation may decline over time.
Don’t be afraid to consult a financial advisor. It will help you solve these complex problems.
Multiple revenue streams
So Social Security alone won’t provide everything you need, so ideally you’ll want to have some other sources of income for your future. Here are some ideas:
- Dividend income: Income from dividend stocks can be great in retirement. One reason for this is that those with healthy, growing dividends tend to increase their dividends over time, which can help keep up with or beat inflation. If you have a portfolio of stocks worth $400,000 with an overall average dividend yield of, say, 3%, you can expect to receive about $12,000 per year, or $1,000 per month. (Probably $15,000 in a few years!)
- Interest income: Interest-bearing investments are also a potentially good source of income, as long as interest rates are not too low. These days, you can find certificates of deposit (CDs), high-yield savings accounts, and money market accounts with yields of 4% or higher, and some closer to 5%. For a $10,000 investment, that’s closer to $400 to $500 a year.
- Rent income: If you are comfortable owning real estate and becoming a landlord, you may also be able to earn retirement benefits from your tenants’ rent checks. But remember, that’s not all. There will be taxes, insurance, and property maintenance costs.
- Pension income: If you’ve ever worked for an employer that offers a pension (perhaps as a teacher or civil servant), you can include your pension income as part of your retirement income.
- Pension income: By spending a meaningful amount on one or more annuities, you can earn a fairly reliable regular income.
- Retirement account: You’ve probably invested in IRAs and 401(k)s throughout your career. Retirement is the time to start making withdrawals.
Of course, there are many other ways to generate income in retirement, such as reverse mortgages and part-time work. Think about what works best for you. Multiple streams look like this:
Of course, specific arrangements may look completely different. But this is an example of how you can combine different income sources to reach your total income goal.
Build a monthly salary
However, keep in mind that these different sources of income require different timing and methods of payment. Similar to Social Security, pensions or annuities may be paid monthly. Dividends are often paid quarterly, but some companies pay them monthly. You may need to accumulate a portion of your income payments and then withdraw them on a monthly basis.
With a retirement account, you may also be able to withdraw money every month. Or, more strategically, you could pay out three or six months’ worth of retirement savings in installments when the market is high, and then pay them less when the market plummets.
As you plan for retirement, consider which retirement strategies will work best for you. The more thoroughly you plan for retirement, saving and investing over the years, the happier you are likely to be in the future.
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