4 Ways to Keep Getting Paychecks in Retirement
Getting a regular paycheck is one of the most comforting things about your working years. Therefore, not getting paychecks in retirement can be a major cause of stress. With all the different investment strategies out there for investing and producing income, the decision of how to create an income plan can be overwhelming. However, I’ve found that most retirees are simply concerned with being able to keep up with the lifestyle they’re accustomed to.
Here are four ways to keep getting paychecks in retirement.
1. Work Part-Time
Okay, this one might be cheating a little bit, but the easiest way to keep getting paychecks in retirement is to simply keep working! Part-time income can be incredibly impactful for some retirees. Just imagine you could make $15,000/year for 10 years after you retire. That’s $150,000 you won’t have to withdraw from your portfolio during that time.
Working part-time or producing a semi-retirement income may not be for everyone, but it could be a great fit for some. I’ve met with many pre-retirees that don’t mind working a little, but they just don’t want to work a lot. They want to work on their own terms. With that said, many pre-retirees have years of experience and skills that still have value. Why not translate those skills into compensation for a few years after your initial retirement?
2. Social Security
While Social Security retirement benefits are usually not enough to cover 100% of retirement living expenses, it can certainly be a decent income supplement. The problem is that too many individuals do not fully understand Social Security and how to get the maximum benefit over their lifetime.
One of the biggest mistakes I see when folks are trying to retire “early” is that they figure if Social Security and other income can cover their expenses at age 62, they’re okay to retire. But, they fail to realize that they are locking in a permanent reduction in their Social Security benefit for the rest of their lives. As inflation rises during their retirement, the decision to collect Social Security benefits at age 62 could come back to haunt them.
So, while Social Security is one way to keep getting a paycheck in retirement, it might be best to delay your “paycheck” start date.
An annuity can provide a pension-like benefit for life, which can be especially attractive for those that retire without a pension.
The process is straightforward. If you have a lump sum from your 401(k) or other investment accounts, you can purchase an annuity, which is an insurance product, and the annuity can provide monthly income payments that are guaranteed for your lifetime. The guarantee is backed by the strength of the insurance company offering the guarantee.
It is important to note that annuities come in all shapes and sizes. Some annuities have high associated fees (2% or more). Investors should avoid annuities with high fees. Investors should also avoid paying for additional benefits they do not need. Those benefits come in the form of “riders” and add to the fee total.
Annuities are financial contracts and can be rigid. If you need to break the contract, you will likely be penalized as a result. Penalties usually come in the form of surrender charges and can be steep in the early years of your annuity contract (8-10% in some cases).
4. Interest and Dividends
If flexibility is important to you, you may want to try a strategy like using dividends to produce income in retirement. There are a handful of stocks with a long track record of paying consistent dividends. Although not guaranteed, retirees may be comforted by the consistency of historical dividend payouts.
Aside from stocks, bonds also pay interest and can be used to provide income to retirees. However, the drawback to using stocks or bonds to provide your “paycheck” in retirement is that dividend and interest payments are not always consistent in their frequency. Some dividends may be monthly while others may be quarterly. Bond interest could pay semi-annually. This makes trying to plan your budget a bit more difficult.
Using this method may require that you hire an investment professional to time the frequency of dividend and interest payments.
Over time, I’ve learned that retirees gain a significant psychological benefit from knowing they can expect regular paychecks in retirement.
Since there are many factors to consider when building an income plan, like inflation, investment risk, interest rate risk, etc., it’s important to consult with a qualified investment professional for help, preferably a CERTIFIED FINANCIAL PLANNER™ professional.
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