Types of Income in Retirement

When you get to retirement age, you’re still going to need money. But what exactly does that look like?

1. Social Security
2. 401k
3. IRA and Roth IRA
4. Savings
5. Real Estate – rental income
6. Investment and Dividend Income 
7. Other Passive Income

Social Security – Most Americans should qualify for Social Security in retirement, but qualification for an individual and for a spouse depends upon qualifying credits built up during a working career. During your earning years, so long as you contribute a sufficient amount to earn the required credits, you will qualify for Social Security.

401k or a Company Pension Plan – Most employers provide a tax efficient savings scheme designed to allow employee to save at the same time the employer may contribute to using pretax dollars.

 The aim of a pension plan is to encourage workers to save for retirement, and by allowing pretax dollars the worker can save faster and benefits in the long run by compounding returns.

IRAs and Roth IRAs are very similar to a 401k plan but allow individuals to prepare additional pretax earnings for retirement. Certain IRAs enable older workers to contribute additional tax-free amounts in an effort to ‘catch-up’ with their retirement savings plans.

Any money you may have in bank savings accounts can be an additional source of income in retirement. Of course, any money saved from employment or inheritance have generally been taxed. While employment retirement accounts are tax efficient, most people like to take their income and whatever they have left after monthly commitments might be saved for vacations, down payment on a home or car or any additional unforeseen expenses.

Real Estate – Some people may have purchased second homes during their working careers when they might have been able to afford a less expensive holiday home with a view to downsizing when it comes time to call it a day at the office. Any real estate investment could be considered as a shrewd strategy especially if they are willing to use it to create income from a rental strategy. In some cases, the annual rental income from a few summer months can be sufficient to pay the mortgage, essentially keeping the costs of ownership down to any required maintenance.

In retirement, the choice is whether to maintain ownership and benefit from the rental income or potentially realize a lump sum capital gain by selling the property and using it as retirement income.

Investment Income from a well-designed stock portfolio built over your working career could also be a useful form of income.

For example, a diverse dividend-seeking portfolio of $250,000 yielding 5% would payout $12,500 or an additional $1,040 per month in retirement.

A final way of earning during retirement years is through passive income, which is a way of earning but with little effort.

While this might mean having to do some work, many retirees find a niche or job which they are passionate about for which they get paid.

For example, a lifelong passion for woodworking and carving cute animals that can be sold in a craft shop could generate earnings. Likewise, making jams, and chutneys or even producing honey from beekeeping could all help generate a small but tidy monthly sum.