Retirement Income Blog

It’s common to find retirees who are asset rich and cash poor.  You may own some of these assets named below that don’t produce much or any income that you can convert to a much larger income stream.

Investment Real Estate
In many parts of the US, investments in rental houses or apartment buildings will yield less than 4% after expenses.  In other words, in the current value of the property is $1 million, you realize $40,000 or less in cash flow.  You could earn the same in a simple bank certificate of deposit.  Of course, the reason you purchase the real estate was for appreciation and that’s the #1 reason to invest in real estate.  But you may have now reached a stage of life where the cash flow is more important than future appreciation.  You can sell and reinvest for more cash flow.  (There are several methods to defer or avoid capital gains tax when selling real estate including a CRT and a 1035 exchange from residential to triple net commercial property which yields higher cash flow).  of course, raw land produces no cash flow and is the best candidate for conversion to an alternative retirement income option.

Your Residence
A reverse mortgage allows you to tap the equity in your home as income.  Many people don’t realize that the equity in their home has a yield of 0%.  Therefore, if you need income and are at least age 62, it’s easy and financially sensible to convert that equity into cash.  You make no payments on this mortgage as long as you reside in the home.  The main criticism of these mortgages is that the initial cost is higher than a conventional mortgage, typically 5% (e.g. $10,000 on a $200,000 mortgage).  But this is a foolish reason to  ignore this option because if you invest $190,000 that you receive in a 6% tax free bond, that’s $11,400 of tax free cash to enjoy that you did not have before. 

Your Life Insurance Policy
You can sell your insurance policy.  Many investors will buy policies from you for more than you can get if you surrender it to the insurance company.  These transactions are called insurance life settlements or senior life settlements.  The buyer will continue to pay premiums on your policy and collect the death benefit when you die.  But they will pay you cash today.  For example, if you have a $1 million policy (pays $1 million to your beneficiaries when you die), that may be worth $250,000 ore more to an investor, the price being a function of your age, health and type of policy.

Growth Mutual Funds
It’s not uncommon for a retiree to own growth mutual funds which pay very little in dividends.  In today’s market, you can buy plenty of high quality, “blue chip” stocks that pay dividends of 6% or higher.  So get out of growth mutual funds into value stocks with handsome dividends.

Just these few tips could increase retirement income so that retirement becomes financially most comfortable.

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Many retirees lack control over 50% or more of their retirement income.  For example, if a retiree has income of $50,000 annually, and $30,000 comes from social security and employer pension, the retiree controls less than half of his retirement income making those sources somewhat useless to discuss.  So let’s focus on the sources of retirement income you can control and how to boost them.

Interest Income
An important source of retirement income is Interest income.  Interest income comes from money you loan.  You may loan it to a bank (in the form of savings accounts or term deposits), you can loan it to a company in the form of owning a bond, you can loan it to a local government in the form of owning a municipal bond and you can loan it to a national government, US or otherwise.  In all cases, these sources of retirement income you control because you select the instruments to own.  Generally, the longer term instruments will pay you higher interest income.  For example, if you want to loan your money to the bank for 12 months, don’t be upset to earn only 4%.  If however you loan you money to IBM for ten years, you may earn 6%–a whopping 50% more in your retirement income.

Of course you may come up with all types of reasons  not to lend to IBM–its not as safe as the bank, ten years is too long, etc. but all of these excuses add up to a much smaller paycheck for you.

Dividend Income
Dividend income from stocks and mutual funds can be an important and significant source of retirement income. If you own mutual funds, there are funds oriented toward paying a consistent dividend income and those that do not.  Are you in the right funds?  Similarly, there are value stocks that pay dividends in the 5% neighborhood while many growth stocks pay no dividends at all.  By your selection of stocks and funds, you control this important source of retirement income.

Annuitization
Although many retirees don’t often think of their retirement income in the following way, they should.  Your assets are always a source of retirement income and how much of your assets you “annuitize,” i.e. convert to an income stream, is a personal decision that can be the difference between eating filet mignon or dog food.  The simplest way to create this source of retirement income is to buy a life annuity from an insurance company.  For example, a 70 year old male purchasing a life annuity for $10,000 can expect payments of $8,500 annually for life.  Of course, when he dies, the $100,000 is gone.  BY purchasing the life annuity, he has converted capital to a source of lifetime income. The immediate annuity calculators will give you an idea of how much retirement income you can obtain in this manner.

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According to the Bureau of Labor Statistics, these are the sources of retirement income and proportions thereof.

Bureau of Labor Statistics

Note that 60% of your retirement income sources are not within your control so it does not need to be addressed.  Let’s address the sources of retirement income you can control.  Let’s also note that the portion of retirement income you can control may be increasing as employer provided benefits have been on the decline (and thus the rise of self funded 401k plans).  Additionally, this more recent data shows that pre-retirees expect to have more of their retirement assets coming form sources they can control:

EXPECTED RETIREMENT INCOME SOURCES

Source: Gallup Poll 2003

As you see form above, there are many sources of retirement income. In fact, within a 401k there are choices such as equity mutual funds, bond mutual funds and real estate investment trusts. Then we could further divide mutual funds into open end funds, closed end funds and exchange traded funds (ETFs).  Within bonds, we have treasury securities, federally backed mortgage notes, corporate bonds and tax free bonds.  Additional retirement income sources would include retirement annuities: traditional fixed annuities, variable annuities and equity indexed annuities. To supply any detail in one article would be overwhelming so in this blog, we have devoted at least one post to each of these retirement income sources and you can locate these posts using the category listing at http://www.retirement-income.net/blog.

The overall approach in designing your retirement income sources is to start with a retirement income calculator to determine your total retirement income needs.  Step 2 is to subtract those sources of income you cannot control (social security, employer benefits, deferred compensation, etc) and this will leave us with the amount of income that needs to be provided by retirement income sources that you can control.

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