I covered how much you need to retire in my last post so the next step is figuring out how to generate the retirement income you need.
First Step: Make a Plan
Only 48% Americans have a plan on how they’ll retire. According to the Employee Benefit Research Institute, those who made a plan have more savings and confidence toward their retirement finance than those who did not.
The amount of time you spend planning and executing your financial goal directly effects how much you will have at retirement.
Second Step: Find the Money
Three major sources that people rely on to generate retirement income are Social Security, pension, and savings. Savings include stocks, bonds, or cash in a retirement fund such as 401(k) and Roth IRA.
Social Security
Fifty percent Americans generate retirement income through Social Security. However, 40% Americans rely solely on Social security to fund their retirement income. If you’re reading blogs like this, you will not be one of them. The average Social Security income in 2020 is $1503. This represents only 40% pre-retirement income.
You can figure out how much you’ll generate through social security at age 62, full retirement age (66 or 67), and age 70.
Pension Plan
Only 31% retirees have a pension and this number is decreasing each year. For those who receive a pension, benefit ranges between $9,262 for private to $22,172 for federal pensions.
Defined benefit plan guarantees a defined amount of income each month and defined contribution plan pays a lump sum when you leave the institution. If your employer offers both plans, do a careful calculation to see which offers a higher yield for you.
401k/ 403b
The most popular retirement plan is the 401(k) with the employer matching a portion of the contribution.
According to Vanguard, the average retirement fund balance is the following:
Age | Average 401(k) balance | Median 401(k) balance |
35-44 | $61,238 | $22,123 |
45-54 | $115,497 | $40,243 |
55-64 | $171,623 | $61,739 |
65 | $192,877 | $58,035 |
How does your retirement savings compare to the median? Taking your time to learn how to invest will pay off in the long run.
Rental Income
Only about 6% Americans expect to generate retirement income through rent. The top 1% get about 25% of their income from investments while the rest rely solely on their earned income.
Real estate investing has many advantages. With some planning, you can also learn to generate retirement income through owning a rental property.
Savings and Interest
The historically low interest rate is good for mortgage or auto debt. It isn’t so great if you have cash in a bank that collects 0.1% interest.
Inheritance
Only 7% of Americans say they expect to receive an inheritance large enough to fund their retirement. You’re more likely to become the generation that takes your family from broke to rich than be the one to receive an inheritance.
Third Step: Execute Your Plan
You figured out how much you need to retire (link to how much) and calculated how much you can generate from Social Security, retirement plan and other methods. What do you do if you’re shy of what you need?
Increase Your Income
If you’re making less than $50,000, it’s difficult to save due to increasing cost of housing, transportation and food.
Americans are not spending their money on frivolous items. Therefore, increasing your income will have the biggest impact on generating retirement income you need. The more you make, the more you can save to invest.
Increase your income by learning a trade, starting a side hustle or advancing your career. Fortunately nurses make a healthy living and can get over time pay. If you work in a specialty such as ER, OR, or ICU, you can pick up extra income by taking calls.
Decrease Expense
Your biggest expense are housing, food, and transportation.
Housing and Food: An average American spend 24% of their earned income for housing (Bureau of Labor Statistics) and only $550 per month on food. There is not much to decrease from these expenses.
Transportation: Since an average American pay $523 in car payment each month, there’s room to cut here.
- Buy a used car for cash
- Choose an economy auto instead of luxury
- Move close to work and reduce your cost of gas
- Consider owning one car if you’re a couple
- Walk, bike, or take the metro to work
Make Your Money Grow
Equity Investing
Invest in index funds, ETFs, stocks and bonds to make the best use of the time horizon you have. According to the Pew Research Center, 41% of U.S. workers have employer sponsored retirement plan yet they don’t know how their assets are allocated or know how to balance their funds.
Learn to manage your money or hire a good financial advisor in order to make your money grow. At minimum, put your money in a target dated fund. This type of fund offers a diversified investment and asset allocation.
Invest in Real Estate
Rental property can generate passive income through many years. It will grow in equity while your tenant pays the mortgage. When you’re ready to retire, you can sell the property and fund your retirement. It is a great way to generate retirement income.
If you don’t want to deal with the work of a landlord, invest in real estate crowdfund such as CrowdStreet or Fundrise. You can also invest in REITs.
Start a Business
Create a business. If it’s successful, you can sell the business and fund your retirement. Isn’t it everyone’s dream to be your own boss and do something that you’re passionate about?
If you have a side hustle, please share what you’re doing. I would love to how creative you are.