Creating Multiple Income Streams in Retirement
Your cost of living will surely be going up. Make sure that your cash on hand keeps pace.
Imagine if I handed you a $50 bill to go grab a soda, and you came back to me with only $5 in change. That would seem outrageous, wouldn’t it?
Well, we all laughed when Doc Brown did exactly that with Marty McFly in Back to The Future II when they had just arrived in the year 2015 from 1985.
We all got the joke. Prices go up over time, even for sodas.
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We’re only weeks away from the exact date, Oct. 21, 2015, when Doc and Marty traveled forward in time. So let’s pause to ponder what our own futures will look like 30 years from now. The cost of living will continue to go up, hopefully not at that extreme rate, but what can we do now to prepare ourselves financially?
Those reaching retirement age now (Baby Boomers born between 1946 and 1964) have enjoyed some corporate perks over the last 30 years that aren’t as common among the GenX and GenY workers today.
When Marty went 30 years back in time to 1955 in the first Back To The Future movie, many residents of Hill Valley (the fictitious town from the movie trilogy) likely had access to a pension (also known as a defined-benefit plan) from their employers. Upon retirement, a monthly income would be paid out for the rest of their lives. That amount varied according to their years of service and levels of annual income while working, but nonetheless it was something that they could count on and they could budget against in their future spending.
Nowadays, pensions are mostly gone, unless you have had a career as a teacher or government worker. So my generation and future generations must look to build multiple income streams in retirement that could include the following:
Dividend-paying stocks: Adding dividend-paying stocks, or funds, to your portfolio is a simple way to bring in additional income. Many companies have a long track record of returning a portion of their profits to their shareholders on a quarterly or annual basis. Make sure if you are trying to keep the distributions as cash that you are not reinvesting the dividends, as sometimes that is the default choice at purchase.
A part-time job: A part-time job might not just offer income, but may be something you want to do after leaving your full-time career. Perhaps you always wanted to teach and just never had the time? Or if there is an age gap between you and your partner, you might fill in some of that time before they retire, too.
Rental properties: When the kids have left the house and you feel like scaling down your home, instead of selling it, you could rent it out. If your old home is in a desirable neighborhood, the rental income could be greater than your new housing costs over time.
Fixed or deferred annuities: Annuities can be designed in multiple ways, but for the purposes of this conversation, think of them like a pension replacement (for those that don’t have one). You can convert some of your savings now into a future income stream that you cannot outlive. Another example here is essentially how Social Security was designed to work.
In order to determine which combination of income streams will work for you, begin with an analysis of your predicted spending in retirement. Working with a financial professional, they can plug this data into planning software programs to predict cash-flow scenarios with different estimates of annual inflation.
If there are shortfalls, now is the time to see how some of these income strategies will affect your plan. You also might find out if you can continue to enjoy your twice-weekly double espresso in the year 2045--when it costs $100.
Kevin Kaplan is a partner at Silicon Hills Wealth Management in Austin, Texas. He is passionate about photography, travel, pizza and live music.
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