Retirement savers are often discouraged by the large number they get from retirement savings calculators and financial advisers. Let’s say you need $2,500 per month to live comfortably in retirement. You will need to have $1.5 million in your retirement portfolio to produce this monthly income using a “safe” 4 percent annual withdrawal rate that is likely to allow your savings to last for 30 years.
Over a million dollars is already an inconceivable number for most of us to grasp fully, and our monthly expenses will probably be more than $2,500. The higher your monthly expenses, the bigger the retirement fund you need to have. This big retirement goal discourages most regular people so much that they just ignore retirement investing.
Instead of amassing a large retirement portfolio, an easier way to save for retirement is by working on retirement cash flow. There are many other ways to generate a $2,500 of monthly income without having a $1.5 million nest egg. Here are some alternative sources of retirement income.
Rental property. Owning and managing a rental property is a great way to generate some income. Being a landlord is not for everyone, but is a valid source of revenue for many retirees. One way to get started in the rental business is to rent out an extra room in your home. When you move to a bigger home, you can try renting out your old home instead of selling it. If you don’t want to be a hands-on landlord, you can always hire a property manager.
Dividend investing. Another way to generate passive income is to invest in dividend paying stocks. The stock market has been volatile lately, but there are still many good dividend stocks. If you have a lot of time left before retirement, you can start investing in a dividend portfolio now and reinvest the dividends for more shares.
Fixed income. If you have a pension or Social Security payment coming to you, that provides a nice base income that your savings can build upon. The average Social Security payment for a retired worker in 2011 was about $1,200 per month.
Part-time work. Many retirees are active and want to continue to contribute to society. Why not take a part-time job to help with the cash flow? Tutoring at the local university, for example, is a great way to spend your time if you have the right skill set. Retirees have a wealth of experience that they can draw on and perhaps make a little money on the side.
Cash flow. A combination of these income streams can be used to cover your $2,500 worth of monthly expenses. For example, if you get $1,200 from Social Security, $500 from a dividend portfolio, $400 from a rental property, and $400 from a part-time job each month, you should be able to cover all of your monthly bills.
It’s not easy to make money from rental properties, but the longer you own a property, the easier it becomes. And a dividend portfolio that pays 3.5 percent yield can generate $500 per month with about $180,000 invested. If you start investing early, this number is realistic.
If you have multiple sources of retirement income, saving for retirement is much less intimidating than depending on one large retirement portfolio. You can surely find other creative ways to generate income on the side. If you start long before you retire, you will have time to build up these side income streams to fund a comfortable retirement.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.