Throughout much of our lifetime, we receive income from a single source: our job. That changes when we retire. Most retirees receive income from a variety of places, including Social Security, retirement account withdrawals and increasingly a part-time job, according to a recent Gallup survey of more than 2,000 U.S. adults, including 636 retirees. "Obviously retirement these days is expensive, and you probably need to draw on as many different sources as you can," says Jeffrey Jones, managing editor of Gallup Poll. Here are 10 of the most common ways to pay for retirement:
Social Security. Social Security is the most common way Americans pay for retirement, and 61 percent of retirees say it is a major source of their annual income. However, only 30 percent of working Americans say they expect Social Security to play a large role in their retirement finances, with younger Americans the least likely to count on it.
A pension. More than a third (36 percent) of retirees say they enjoy a steady stream of pension payments in retirement. And retirees who have $50,000 or more in annual income (55 percent) are twice as likely as lower-income retirees (27 percent) to say a traditional pension plan is a major source of their retirement funds. Only about a quarter (24 percent) of current workers expect to receive traditional pension payments in retirement. "Fewer employers now are offering pension plans and are moving toward 401(k)s," Jones says.
Retirement accounts. Almost half (46 percent) of workers expect a 401(k), IRA or similar type of retirement account to help fund their retirement years. But only 23 percent of retirees say retirement account withdrawals contribute significantly to their annual income. The youngest workers are the most likely to expect to rely on their retirement accounts for income in retirement. "It's also important to have a mix of after-tax money and pre-tax sources so that you can have the flexibility to manage your taxes as you take out required minimum distributions from different accounts," says Lauri Salverda, a certified financial planner for Clerestory Advisors in Mendota Heights, Minn. "If you have a mix of assets, you can avoid moving yourself into high tax brackets when you need to take your required minimum distributions."
Home equity. You can use your home to help pay for retirement if you sell your current home and downsize or take out a second mortgage or reverse mortgage. Some 20 percent of workers are expecting to use their home equity to help fund their retirement years, which matches up with the 20 percent of retirees who used the value of their home to help finance retirement. "I think most financial planners view home equity as a last resort," says Christopher Jones, a certified financial planner for Sparrow Wealth Management in Las Vegas. "We build a retirement plan that does not include home equity, and the only time we begin considering it is when things do not go according to plan."
Stock market investments. Some retirees (13 percent) use individual stocks or stock mutual funds to pay for retirement, which is similar to the 18 percent of workers who expect the stock market to help fuel their retirement. "We believe you need to have a portion of your money in the stock market simply because of life expectancies in retirement," Salverda says. "You're looking at a 30-year time horizon, so you want to make sure your money is growing over that time and also to cover inflation." Unsurprisingly, retirees with incomes over $50,000 per year (21 percent) and workers earning $75,000 or more (27 percent) are the most likely to be investing in the stock market for retirement.
Savings accounts. Savings accounts and CDs are a major source of retirement income for 14 percent of retirees. A quarter of workers are hoping these FDIC-insured accounts will help fund their retirement years, including about half (49 percent) of people in their 20s. "If you put all your money in fixed income or bonds or CDs, you are guaranteeing yourself very low returns that in many cases barely equal inflation. The majority of people need to grow their funds to at least outpace inflation," Christopher Jones says. "I recommend that when you are in retirement, you should have a minimum of somewhere between six months and a year's worth of expenses in a liquid account that has no income generation potential. Then you won't be worried about how you are going to survive for the next year."
Annuities or insurance plans. Immediate annuities promise a steady stream of payments, no matter how long you live. The catch is that you must hand a large chuck of money over to an insurance company that you can't get back for emergencies or give to heirs, and the costs of this investment can sometimes be high. "If someone doesn't have much beyond Social Security in the form of an annuity income, I think there's a lot of benefit to creating an annuity because it spreads the risk of dying across large groups of people," Christopher Jones says. "You might annuitize enough money to cover all your basic expenses between the annuity and Social Security, and then use the rest of your assets for other things." Some 9 percent of workers are counting on annuities or insurance plans to help fund their retirement years, and similarly, 9 percent of retirees receive retirement income from these sources.
Part-time work. Many current employees (21 percent) expect a part-time job to be a major source of their retirement income, but only 3 percent of retirees say they receive significant income from continuing to work in retirement. "Even if people have a desire to work in retirement, there may not be enough jobs for those people," Jeffrey Jones says. Retirees under age 70 (5 percent) are more likely to receive a significant amount of income from a job than those age 70 and older (2 percent).
An inheritance. A few workers (8 percent) are hoping an inheritance will help to fund their retirement years, but only 3 percent of retirees are actually using inherited money to pay for retirement. People in their 20s (14 percent) are significantly more likely than those in their 50s (3 percent) to think money willed to them will enhance their retirement plan. "Even if you have a parent that may have significant assets, they might be eaten up paying for assisted living or home care," Salverda says. "I certainly wouldn't count on it, and then if you do get it, it's kind of a bonus."
Rent and royalties. Income from rental properties or royalties from previous works is a significant source of income for 4 percent of retirees. And about 6 percent of workers hope rent or royalties will be a significant portion of their retirement plan. "I view rental income as one of the more risky ways to have retirement income because there are so many things that can affect an individual property and its ability to produce income. All you have to do is have one really bad tenant, and this really good investment can become a nightmare," Christopher Jones says. "It might be better to have your money in a real estate investment trust, where you still get the benefit of income but it is spread across hundreds of real estate investments instead of one piece of real estate."