Income Ideas for Retiring Early – Part 2
This is Part 2 of Income Ideas for Retiring Early. Did you miss part 1? Go to Income Ideas for Retiring Early – Part 1.
Is your retirement income guaranteed? Do you have sources that will make sure you have monthly deposits into your bank? Are you familiar with the guaranteed income option that you may be entitled to? Have you developed an income plan with guaranteed sources for that retirement security you want and deserve?
Most Americans qualify for Social Security when they retire, either under their own employment record or that of a spouse. The longer you delay starting benefits, the higher the payout. Whatever level you start at, you basically lock into it for life; it will increase only for inflation. Therefore, it’s worth considering other assets you may tap to allow you to delay taking Social Security for as long as possible. After all, this is a guaranteed, lifetime income source.
There are two key factors to consider with a pension. First, does it stop (or reduce) benefits paid to your spouse in the event of your death? If so, you may want to carefully weigh the value of a regular payout versus a lump sum, if you have the choice. This is a decision that should be assessed within the context of all your other assets, so it’s important to consult with an experienced financial advisor to decide which option is best for your circumstances.
A fixed annuity offers another guaranteed source of income. It’s actually an insurance contract that you purchase with a premium, and all the guarantees for income and death benefits are backed by the financial stability of the issuing insurance company, much like a life insurance policy. A fixed annuity offers a fixed income paid in regular installments starting at a specific date in the future. If you want income to start right away, you can purchase an immediate annuity.
If you like the guarantee of income payouts but are worried you’ll need periodic increases to keep up with the cost of living, you may want to consider an indexed annuity. This type of annuity guarantees a minimum interest rate to grow your payouts over time, plus it
credits interest linked to an equity index such as the S&P 500. When the index performs well, your income base is credited with a portion of that gain, which can deliver potentially higher payouts over time while still protecting the accumulated value from losses due to market fluctuations. Keep in mind the annuity does not actually participate in the index or any equity or fixed interest investment; the index is simply used as a means to calculate interest credits.
Bear in mind that annuities are complex and may include fees. Annuities are subject to limitations and rules, including surrender charge periods, as well as caps and spreads. You should work with an experienced insurance professional to determine if one is suitable for you and, if so, which type would work best.
The earlier you retire, the greater your need for a growth component within your portfolio. Should you and/or your spouse live for many decades, your income will be exposed to a variety of challenges. For example, a fixed income won’t keep pace with increases in the cost of living over time. You may experience significant health and/or long- term care expenses. You could simply run out of money and be stuck with nothing but Social Security.
The good news is that the longer you live, the longer your growth- oriented investments have to earn more money and smooth out periods of market volatility. It’s also important to recognize that after significant market drops, such as the ones we’ve experienced in recent recessions and the pandemic, the stock market has a history of strong recovery. If you retire early, you don’t want to be fully out of the market and miss out on those gains.
People who can consider retiring early (before they qualify to receive Social Security benefits) generally have significant assets accumulated in an investment portfolio. However, it may not be enough to last a retirement that will be significantly longer because they retire early.
This means you need to be strategic in positioning invested assets to provide both income and capital appreciation. Financial independence generally indicates that you have enough assets to produce income that meets or exceeds the amount of income you earned while working. Therefore, even if are ready to retire with a million-dollar portfolio, you don’t want to take all that money out of the market and stick it in a bank account. By taking small distributions to cover your needs, the rest has a chance to keep growing. The key is to minimize the risk exposure of those invested assets. Discuss inflation-aligned investments with your financial advisor.
If retiring early is still going to be very difficult, then the real solution is to pare back your lifestyle. You may want to consider downsizing to a smaller house or a condominium to reduce ongoing utility, tax, maintenance and insurance expenses. You might consider combining households with an adult child, using your assets to build on a mother-in-law suite to his or her house or add a granny flat in the backyard. While you may not be able to leave your child a large inheritance, this could help add to the real estate value of his or her home.
If you have plenty of assets now but worry about running out in the future, you may want to consider moving to a Life Plan community. This would enable you to consolidate expenses such as living, utilities, dining, household maintenance, health and long-term care all under one fee. This can help you estimate your lifetime expenses from the outset.
Here’s a key principle to remember: Most people draw retirement income from a number of different sources. By diversifying your portfolio across fixed income sources, guaranteed income sources and long-term growth opportunities within your comfort level for risk, you may be able to retire early while still growing a nest egg for the latter stages of your retirement.
Just as it’s a good idea to diversify your investments, it’s equally important to diversify your retirement income sources. This may help reduce your tax liability and the risk of your income sources drying up. Remember, retirement may last 20 years or more, so spend a lot of time upfront working with an advisor to develop your plan. This is all the more critical if you decide to retire early.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC. The advisory firm providing you this report is an independent financial services firm and is not an affiliate company of AE Wealth Management, LLC. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management. This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.
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