There's one major goal that most of us have for the end of our working life: retirement! Maybe you've put in decades at your job, and ready to take advantage of your pension to live a luxurious life. Perhaps you spent years working, slowly accumulating a small fortune in retirement accounts that you're ready to put to use. Or maybe you're still young, and are simply hoping to reach that ‘retirement' phase of your life while putting spending as little time in the ‘work' part.
Regardless of where you are on the path towards retirement, it's important to look at the ways you'll begetting income during retirement. Knowing how you'll be getting money will help you to determine everything from how much you'll to save to how you'll need to keep working. To help figure that out, we're going to be looking at the pros, cons, and commentary on these
Sources For Retirement Income
1. Defined Benefit Pensions – One of the classics. The first of the three legs on the ‘three-legged stool‘ that made up a traditional retirement. Once upon a time, it was as common an offering for job positions as 401(k) plans are now. (Not surprising, given that 401(k) plans essentially replaced pensions.) Upon retirement, you are given a fixed amount of money every month for the rest of your life.
Pros: They provide you with regular payments for the rest of your life. You don't need to worry about exhausting your account or otherwise running out of money. The contributions to the pension fund were typically provided entirely by employers, eliminating the need to save or invest on your own.
Cons: Pensions are nearly non-existent nowadays. The payouts tend to be small for those that do exist (typically under $10,000 per year), and are not usually adjusted for inflation, to boot. The benefits are based on your years of service and final income, among other factors, limiting the control over how much you can earn. You also need to depend on your former company being able to provide continued payments.
Comments: If you have the option for a pension, you should definitely take advantage of it. That said, don't expect it to cover all, or even most, of your retirement. (Or to exist at all in the not too distant future.)
2. Social Security – The second leg on that retirement stool, here you have regular payments from the federal government, thanks to those Social Security taxes you've been paying every year. The concept is pretty similar to the pensions up there: you'll get money on a monthly basis from the time you opt to take your benefits (not retire, per se, as you can retire prior to taking Social Security payments) until your death.
Pros: Regular payments for the rest of your life, with the added benefit of being adjusted regularly for inflation. Those payments are related to the amount you pay in Social Security taxes during your working life, and thus are tied to how much you make (make more, get paid more). Because it is paid by the United States government, the chance of default is (nearly) nonexistent.
Cons: Social Security's continued existence is frequently in question, and depends on the continued support from the federal government and the politicians therein (as well as the financial situations of its ‘trust fund'). The declining income relative to payments means that the payments are likely to be less than advertised (particularly if you are less than 50). With the average payments at $11,000 per year, don't expect this to cover all your spending.
Comments: As with pensions, don't dismiss a regular paycheck. Also as with pensions, when planning your financial future, use caution when it comes to estimated Social Security payments, as I've noted before. Assume the payments you receive to be a portion of what you are promised in the annual mailings from the Social Security Administration (I'd say no more than half, tops), that way, you aren't caught expecting more than you will actually get.
3. Working Part-Time – ‘What the heck?' I hear you saying, ‘I thought that retirement meant NO working!' Don't get me wrong, I'm not suggesting that you give up your retirement and keep working full-time for the rest of your life. But working part-time, or for part of the year, can provide numerous benefits to your financial situation, and can, if done right, be as rewarding as full retirement at a fraction of the cost.
Pros: Continuing to work will help to bring in more money to slow down the withdraws from your retirement accounts, and perhaps even boost your accounts if you earn enough. That means less time that you to live off of your retirement savings, and possibly the chance the boost your Social Security benefits to boot (as well as your pension, if available). There's also more flexibility in your job choices, giving you a chance to take a job you enjoy more than your current position (perhaps something online, like a blog or an online store, that allows you more freedom in where and when you do your work).
Cons: You're working. If you earn too much, it can also cut your Social Security benefits, lowering how much you get in benefits. If you're stuck in a job you dislike (to put it mildly), it can prove even less enjoyable than trying to get by on limited funds. Even in a dream job, you are still working, making it a semi-retirement at most.
Comments: The easiest, but probably least pleasant, way to make your retirement money last. While not something I would suggest to everyone, particularly those with horrible jobs, if a few more years can give you the possibility to retire flat out and be sure (or as sure as you can be) that your money will last for the rest of your life, I'd definitely recommend it. Plus, it will give you a chance for a ‘trial run' of your retirement plans, to see if you are actually able to retire with the money that you have, without the risk of finding yourself out of cash and having to go back to work full-time. (And needing to find a whole new job when you are older and have been out of the workforce for a while, to boot.) Speaking of cash:
4. Personal Savings and Investments: Ah, the third leg of the retirement stool, and one that is increasingly holding the whole stool upright. This is what most retirement articles and magazines tend to focus on when giving retirement advice, as you have the most control over how substantial the savings are and the way they are put to use. With the rise of 401(k) and IRA plans as well as ever increasing investment options, there are more options than ever for you to build up a retirement cache for yourself.
Pros: You have control. Everything from the amount you save to the type of savings account you choose to how you invest your money is up to you. It's the primary way to fill any gaps that Social Security and pensions leave in financial needs. It's also one of the most important methods if you are hoping for an early retirement.
Cons: You have to do the saving. It can be tough to put aside the necessary amount of money to provide a decent income for your retirement. It can be even tougher to find investments that provide a proper mix of growth and safety to build up your savings while not endangering them in a troubled marketed (look at 2008 as an example).
Comments: Alas, in our current world, you have little choice but to save and invest on your own; those other two stool legs look pretty wobbly, and if you ever hope to completely stop working, you need to have enough money put aside to provide for yourself. How to invest it to build it up is a popular topic for money writers (myself included). As to what to do to turn those investments into a source of retirement cash…we'll have suggestions on that later in the week.
