Today on Agile Finance Radio, we will talk about generating an income in early retirement. We’ll discuss four income sources and a couple of approaches that you can use in your income strategy.
- Learn about four income sources you can use to add security to your early retirement.
- I’ll discuss my preferred method for generating an income in early retirement.
Dig deeper into working during retirement.
Listen in on my conversation with Jon Harris about his early retirement.
Setup a free assessment with Jason to discuss your financial situation.
Deciding to take early retirement can add more complexity to your retirement planning. Let’s say that you’re going to retire at 55 and you live to 65 years of age. At that age, there’s a good chance that you’re going to live till you’re 90. You could be in retirement for 35+ years.
That’s a long time to try to predict what’s going to happen with the equities market or with inflation or any other variables that can affect your plan. This makes the game a little bit more challenging, so you have to approach this phase with an agile perspective.
It might be helpful to walk into early retirement in phases so that you can navigate any obstacles and be flexible and adjust your assumptions and expectations.
With that, let’s talk about some of the income opportunities that you might have available to you or things that you can work toward.
Savings and Investments Generating Your Income
The first income stream that most of you will have is from your savings and investments. For most, this will be one of the biggest income generators. Hopefully, you’ve been saving and investing for your future retirement. You have accumulated an amount that will be able to provide some of the income that you need to support the lifestyle you want.
In the technology industry, you have that opportunity. Not everyone does, and indeed, not everyone has saved for their retirement. Studies that I have read from Vanguard, Fidelity, and others show that the majority of Americans have under saved for their retirement.
Obviously, we’re talking about averages here, but I think people in the technology industry have some advantages because of the industry. The tech industry typically has excellent company benefits, 401(k) matches, stock options, and higher compensations. So there’s a good chance that you have saved, or at least I hope you have saved for your retirement, and you have or will have a sizable bucket of money to fund your retirement.
If we do so quick math here, we can use a simple rule of thumb called the 4% rule. The 4% rule study showed that you could take out 4% of your portfolio every year and use that for your income, which would last over a 30-year timeframe. That doesn’t mean that this is the right number for you. You have to take this into the context of your situation and have a solid plan to make sure that it is reasonable for you.
Let’s say you have a $1 million portfolio. You could expect to take out $40,000 a year or $3,333 per month from that million-dollar portfolio. Based on the research, there’s a good chance that the portfolio will last for 30 years.
Obviously, we can’t guarantee market returns in the future, but we can use that as a guide and a target to think about if you’re expecting to live off your savings and investments. If you believe that you’re going to withdrawal $80,000 of income and all you have is $1 million, then I would suggest that you rethink that strategy because you’re going to run out of money. That’s just the math.
If savings and investments are the only part of your strategy, you’ve got to make sure that you’ve thought through that and understand what a safe amount you can take out every year and not run out of income by the time you’re in your 90’s or beyond.
Social Security Income
The next thing you’re probably going to be thinking about from an income standpoint is what you will get from Social Security? If you’re retiring early, say in your 50s, you can’t take out Social Security. You probably already know that, but just in case you don’t, the earliest you can elect Social Security is at age 62.
If you decide to take Social Security at 62 when you qualify, then you’re going to take a significant benefit cut as well. So it would be best if you thought through that strategy to understand what you’re giving up. If you need to supplement your income because you don’t have enough other assets to generate the income necessary, then that may be the right choice for you if it supports the lifestyle that you want to live.
There are many things to think about when you decide to take your Social Security. You can delay it until 70 and get an increased benefit, or take it at your full retirement age or anywhere in between. I would recommend using some calculators or working with an advisor to determine when the optimal time for you to take your social security.
There are also considerations if you are married. If you decide to take early retirement, and then something unforeseen happens. You pass away, then your surviving spouse will get the Social Security amount based on the early retirement amount.
So that’s another consideration to put into the planning phase to think about. If you have the resources you need to generate an income without Social Security, then it might make sense to delay until later until full retirement age or later. This will add extra income to your surviving spouse, which could be beneficial later on if they live a long life.
Real Estate To Generate Income
Another income opportunity that I see some of my clients using is real estate. In fact, it’s one of my income stream sources. I like real estate, and it adds some diversification to my assets.
Real estate can be tricky, and you need to know what you’re getting into. There are all kinds of ways to invest in real estate. You can be a direct owner of the property and be the landlord responsible for everything. Or you can have a management company take care of the property for you.
You can invest in different types of real estate. Whether that’s single-family homes, multi-family units, commercial properties, or investing in real estate investment trusts know as REITs. There are different ways that you can generate income from real estate. It would help if you were educated and comfortable with the real estate style that you want to invest in.
I know many people think about real estate, but they don’t have the experience or the understanding of what it means to be an investor in real estate. It can be complicated, and if you don’t buy the properties correctly, or if you don’t understand how to operate the real estate investment successfully, this could be a nightmare for you.
I like to tell potential investors that you have to like real estate, and you need to understand the industry and enjoy the process. For hands-on people, you might actually like being a landlord and working on the properties. You can wear many hats, and that could be something that you really enjoy because it allows you to work and also be around people. It all depends on you and your style.
It’s essential to understand the business aspects of real estate. You could end up owning a property that you think is profitable, but in actuality, you’re losing money because you’re not keeping records and don’t know your P&L and balance sheet well enough.
For me, I don’t buy properties for appreciation. I buy properties for income, and the appreciation is a bonus if I want to exit at some point in the future. Houses don’t always appreciate, and many people find themselves reluctant landlords because they are under water on the property.
Part-Time or Self Employment
Another source of income for early retirement to think about is having a part-time job or moving into some kind of self-employment. You might be a teacher, consultant, or do something that you enjoy, like tennis, golf, woodworking, crafting, or an outdoor guide and turn that into an income.
There are more reasons than money to engage in some type of work. Early retirement can be more than just taking off of work. I think this is an excellent strategy to use to ease yourself into early retirement. This keeps you active and gives you something to do to occupy some of the time.
You also are still contributing to the world with your skills and also keeps you in social circles with other people. It allows you to kind of test out how retirement will be without going all-in so you can get a feel for what that’s going to be like. Having some work is not just about the money. It helps with the social, behavioral, and emotional aspects of moving into that phase of your life. Of course, the extra money could be beneficial as well!
So that’s a few ideas for generating income that you’ll need in your retirement years and maybe some that you haven’t thought of as well.
Let’s talk about a couple of retirement scenarios to think through to decide what might be the right path for you.
Assets Generate All Income
You could decide that you’re just ready to turn on the retirement light switch, so to speak. You’re done with work, and you’ve accumulated enough assets that you think can generate the income that you need, and you’re ready to step into that phase of life.
There’s nothing wrong with that, and people take that path, especially in previous generations. But retirement is different now. It’s not like my parents or grandparents’ generation. In my opinion, we have more risk that we are faced with since most of us are self-insured, so to speak, with our retirement incomes.
In previous generations, things were different because many industries provided a pension, and along with that, you had Social Security. It really didn’t matter how the market was doing, as most people didn’t have to depend on their investment portfolio to generate their income. They didn’t have the market risk that we have today, and they had a dependable, secure income.
If you’re going to go this route, you need to make sure that your plan incorporates some risk factors. For example, what happens if the market has two or three bad years as soon as you step off into retirement? What does that do to your portfolio?
What if inflation starts creeping up to three or four percent? It’s been around two percent or below for the past several years. It’s something to think about and run some plan scenarios.
Combine Income Streams
The other retirement scenario is where you have multiple income streams. This is a good strategy and is what I prefer, especially in early retirement.
In this scenario, you’ve built up a bucket of savings and investments that you can use to generate income. But you’ve also developed other streams of income. Maybe you have two or three income streams, as we talked about earlier.
This provides that extra buffer when you’re thinking about early retirement. If you were 65 and at a more traditional retirement age, then maybe your 401(k) assets along with Social Security might be plenty to generate the income that you need.
But when we’re talking about a retirement that could last as long as you’re working years, it might make sense to also add on that extra income stream. Whether it’s part-time work or self-employment, the work allows you to preserve more of your investments.
The work could provide other benefits such as reduced cost on insurance if you are part-time at a company. It could provide additional social and emotional benefits because you’re in a community with people, and you’ve got something to look forward to, and you know you have a purpose with the work you are doing. All of these are critical to your health and wellness.
Hopefully, that’s given you some ideas on income sources and a view into how you might turn one or more of those sources into income streams for you to help make your retirement more secure.
If you’re thinking about early retirement and want someone to look over your situation, then head over to agile finance radio.com and select the work with me option. You can schedule a free assessment call with me, and we can talk about your unique situation.
That does it for this episode of Agile Finance Radio. Tune in next time as we discover more ways to win with money, gain at life, and ultimately retire with confidence.