Here are some of the major ways that retirees support themselves after they say goodbye to the full-time work world.
Although the vast majority of Americans above the age of 65 do receive monthly payments from this tax-funded federal program, it’s unwise to plan too heavily around it. In order to remain viable, the system will have to undergo major changes that will likely result in a smaller payout for many future beneficiaries.
401(k)s (and similar plans)
These employer-organized plans-whereby companies deduct a portion of their employees’ paychecks to be withdrawn after they leave the workforce-is one of the most tried-and-true means of generating retirement income. Since the money is deducted before taxation, the employee doesn’t have to pay taxes on it until after withdrawal. Similar plans include the 403(b) for employees of non-profit organizations and the 457(b) for government workers.
An IRA is an account set up directly between an individual and an insurance company using money that has already been taxed. The individual has more freedom of investment with an IRA than with a 401(k), but there’s also a much lower maximum annual contribution. Many Americans diversify their savings by using a combination of both methods.
Company pension plans
A pension is different than a 401(k) in that the employer contributes to the fund directly rather than setting aside a portion of the employee’s paycheck. The employee has no control over how much is contributed or how the money is invested. Pension plans are still used, but they’re considered increasingly dated.
An annuity is a fixed amount that individuals receive every year, usually from a sum of money they’ve set aside for themselves or an inheritance they’ve received. There’s no annual contribution limit (a useful quality for people who’ve gotten a late start saving), but it’s important to be on the lookout for hidden fees.
Individual stocks and bonds, mutual funds
In this economic climate, it can be risky to invest too much in the stock market, but on the other hand, there are certain tax advantages that come with not solely relying on accounts specifically designated for retirement.
Individual Savings Accounts/CDs
On the flip side, it’s prudent to keep a portion of retirement income outside the stock market, in savings accounts or CDs. Nobody can predict the future of the economy, and sometimes one needs to be able to access liquid assets at short notice. It’s all about finding the most comfortable balance between guaranteed money and riskier-but-potentially-more-profitable investments.
Many retirees sell their homes and downsize, and then they use the profit to fund living expenses after retirement. One way to continue living in the original home is to take out a reverse mortgage, but watch out-this isn’t an appropriate option for everyone. Depending on the particular financial situation, it could be a good way to wind up in debt.
Other sources of retirement income available to some people include inheritance, royalties from artistic works, income from properties rented out, and part-time work. More and more retirees are picking up a part-time job after retirement, and there are many websites that cater specifically to this demographic.