Retirement has evolved significantly over the years. It’s no longer only about saying goodbye to the workforce and enjoying a leisurely life of relaxation. These days, retirement has transitioned from “the end of an era” to a vital and dynamic phase of life filled with opportunities for continued growth and financial stability.
This shift in how retirement is perceived has dramatically impacted how pre-retirees plan to create income during their next era of living. Here we’ll explore what income streams are available to retirees and how professionals who are 5 to 10 years away from retiring can create a savings strategy to support a retirement lifestyle that’s most meaningful to them.
The Changing Landscape of Retirement
Historically, retirement income originated from a few key “buckets”, including social security, pension benefits, and savings. Previous generations of retirees could comfortably rely on a combination of Social Security and pension benefits to sustain their lifestyle – anything else they had set aside was often viewed as icing on the cake.
By comparison, the stark reality that future retirees face today is far different.
During the 1980s, pensions began waning in favor of non-guaranteed 401(k) plans. The 401(k) as we know it wasn’t introduced until 1978, and even then, it was primarily a provision by lawmakers to limit companies from creating tax-efficient profit-sharing plans that were originally designed to grow the wealth of company executives.
This means in modern America, you will likely need more than one income stream beyond Social Security or a pension to provide the financial security and lifestyle you desire in retirement. In fact, in 2023, retirees received only $1,837/month on average from the Social Security Administration (SSA). Pre-retirees today are looking for ways to become increasingly creative in their savings strategies, especially as their lifestyle goals for retirement evolve.
“Traditional” Retirement Income Streams
For years, retirement planning was viewed as a three-legged stool. Each of the three legs – Social Security, pension benefits, and retirement savings – was said to carry a balanced weight in helping retirees financially prepare for their next chapter. While the picture of how investors prepare for retirement is changing, it’s still important to understand these cornerstone income streams before diversifying.
Social Security
Established in 1935 as part of the New Deal, Social Security is a program employees pay into throughout their careers. They become eligible for monthly payments once they reach retirement age, typically around 65 to 67, depending on when they were born.
These payments are calculated based on a worker’s earnings history and can be a critical source of income to cover essential expenses, such as housing, healthcare, and daily living costs, ensuring a more financially secure and dignified retirement for millions of Americans. Social Security also provides survivor and disability benefits, further enhancing its role as a social safety net.
However, while many Americans still receive Social Security benefits today, there is some doubt whether the program will continue to exist or if future benefits will be reduced.
Pension Plans
If you’re fortunate enough to have a pension plan, you may have a significant financial benefit in your retirement years. In general, your pension plan either pays out one lump sum payment when you initially retire or you receive a set amount (monthly or annually) over the remainder of your lifetime. Depending on your plan, your spouse may also be eligible to continue receiving benefits after you pass away for the remainder of their lifetime as well.
Even if you have a pension, it may only partially cover some of your living expenses. For example, the CalPERS (California Public Employees) pension only pays out an average of $38,000 to $42,000 per year as of 2022. This is where other income streams can be helpful.
Retirement Savings
Your personal savings plays a crucial role in retirement. You may save through a tax-deferred account, like a company 401(k), or leverage a taxable retirement savings account such as a Roth IRA. Unfortunately, many pre-retirees are under-saving for retirement – if they’re saving at all. Recent studies highlight how the average American only has $65,000 set aside for their future retirement.
A key goal at Abacus is to help educate investors about the importance of saving early and often for retirement, even if you’re unsure what you want the next chapter of your life to look like. If you’re unsure where to start, exploring how to prepare for retirement in each decade of life can be helpful.
Alternative Income Streams to Fuel Your Ideal Retirement
While it’s true that retirement income still largely comes from the three “traditional” income sources – Social Security, pension benefits, and retirement savings – having several different revenue streams and diversified investments can help retirees unlock lifestyles that honor a more modern sense of retirement. Here are some income streams retirees might consider:
Part-Time Employment: Part-time employment in retirement may provide personal fulfillment and extra financial stability. Perhaps you love movies so you work part-time at the local theater. With a more flexible schedule in retirement, animal lovers can provide pet-sitting services for their neighbors. If you’re feeling particularly entrepreneurial, starting your own small business in retirement can also add meaning and purpose as you transition into a new era of life.
Rental Income: With the advent of both long-term rentals and short-term Airbnb and VRBO rentals, many retirees look to real estate investments as a source of steady cash flow. Of course, getting into the rental game isn’t always a walk in the park, and it’s critical to do plenty of research before making significant, long-term monetary commitments.
Dividend Stocks and Bonds: Some retirees look to further diversify their investment portfolio through passive income streams, like dividend stocks and bonds. These investments require careful consideration and like most investment decisions, we recommend working directly with your financial advisor.
Freelancing or Consulting: If you love what you do, transitioning into a part-time or consultant role may be an excellent fit for you in retirement. You can leverage skills and experience to create a more independent work environment and build a client base that promotes a manageable and profitable workload.
Online Ventures: E-Commerce, dropshipping, and affiliate marketing – oh, my! The options for creating and monetizing content online today are endless, and retirees are taking note.
Why Seek Out Additional Income Streams In Retirement?
For several reasons, a more traditional retirement income plan may not be sufficient in today’s world. First and foremost, the life expectancy of Americans continues to increase. With longer life expectancies come increased healthcare expenses and a longer timeline where retirement savings must cover your lifestyle.
Retirees also find that their desired lifestyle and hobbies can be more expensive than they initially anticipated. People looking ahead to retirement today are often healthier, more vibrant, and have entered this new life season with an abundance mentality. They view this time as an opportunity to try new things, travel, and thrive. Additional income streams can support these goals, allowing them to make an impact, leave a legacy, and enjoy a fulfilling life.
Finally, it’s no secret that over the past few years inflation and economic uncertainty have put a significant amount of stress on tomorrow’s retirees. Inflation can erode the value of your savings, and COVID-19 has taught everyone about expecting the unexpected. These are additional reasons pre-retirees might consider alternative income streams so they can hedge against uncertainty and build a financial safety net.
Building Your Comprehensive Retirement Income Strategy
Whatever your motivation for exploring multiple income streams in retirement, there are key steps worth taking when deciding what type of income you’ll need:
1. Setting Goals
One way to enhance a retirement plan is to visualize your ideal retirement lifestyle. Take time to get clear on your short- and long-term goals throughout retirement. Imagining both the “bucket list” memories you want to pursue and what you want daily life to look like can help bring a clearer understanding of the expenses you can expect to incur.
2. Considering “Unexpected” Expenses
It pays to anticipate potential financial speed bumps you might encounter in retirement. Long-term care, increased medical expenses, or even needing to relocate or adjust your living situation to accommodate changing physical needs are all potential expenses. Building these into your retirement plan can help you offset future costs.
3. Evaluating Your Current Financial Situation
How are you currently living and saving? Understanding your baseline expenses (and how much you’re on track to have saved when you retire) can help you clarify what – if any – alternate income you may need during retirement beyond what you’re currently saving. There may also come a time during retirement when you need to reevaluate your spending to make adjustments. Regular financial check-ins can help
4. Creating a Well-Diversified Portfolio Now
Prior to retirement, offsetting risk through a globally diversified investment portfolio can create healthy investing and savings habits that can help to set you up for future success. By having a more diversified portfolio, you can help build a buffer to the natural volatility in financial markets and protect your future self from unanticipated financial swings.
5. Review and Adjust Your Strategy
As you near retirement, you’ll likely have more clarity on your lifestyle goals, what Social Security or pension benefits you may be eligible to receive, and your risk appetite for how you invest (either less or more). Focus on adjusting your strategy in an ongoing capacity to reflect your needs and values as you draw closer to retiring.
What Will Your Retirement Look Like?
As retirement possibilities continue to expand for future generations, so do the possibilities for achieving fulfillment. The more investors embrace the evolving concept of retirement and tailor income streams to their unique needs and goals, the more likely they can build a life (and a financial plan) that truly supports a meaningful lifestyle.
As you continue your journey toward retirement, know that Abacus is here to answer any questions you have. Reach out to an Abacus advisor today and see how we can help you expand what is possible with retirement.
