How to build a retirement income stream

Before you retire, you’ll need a plan for how you will pay for your expenses. Since you won’t have a full-time job to rely on for income, building a retirement income stream looks very different from income in your working years. Many retirees rely on a combination of several income streams to fund their retirement. Learn how to build a retirement income stream to set you up for a comfortable retirement.

What you’ll learn about:

• Income producing products
• Systemic withdrawals
• Other retirement income sources

Income-producing products

One option for retirement income is to put your money in income-producing products, which include a variety of financial products such as certificates, money market accounts, bonds and more.

The primary advantage of income-producing products is they don’t reduce your original retirement savings. Instead, you use that nest egg to produce additional income you can then use for expenses.

However, this method’s primary drawback is that many income-producing products simply don’t provide enough income for most retirees. For example, the average rate for a certificate of deposit (CD) for the last decade was under 1%. To put a 1% rate in context, you would need $5 million in retirement just to generate a $50,000 income.

Of course, many certificate rates are now higher than this, and alternative income-producing products exist offering higher rates, such as bonds. These can certainly help boost your retirement income, though they’re more likely to supplement your total retirement income than meet your needs entirely.

Additionally, since the rate you receive on income-producing products can change, your income from these sources will change as well. For example, if you open a five-year certificate, you lock in that rate for the duration of the certificate so long as you don’t withdraw your money early. However, if you want to renew your certificate when it matures, it’s likely the renewal rate won’t be the same, resulting in your income changing as well.

Systemic withdrawals

Another method of generating a retirement income is through systemic withdrawals. This involves taking investments and selling a small portion at regular intervals to fund your retirement.

For example, imagine you have $500,000 invested in a retirement fund, where you own 100,000 shares, each worth $5. If you want to bring in $1,500 a month, you’d need to sell 300 shares. However, investments can change in value over time. In a good month, where your investments have gone up in value, you’d need to sell less shares to generate the same monthly income. Conversely, if your investment value goes down, you’d need to sell more shares.

This method can be used with retirement accounts, such as a 401(k). If you’re unsure how to manage systematic withdrawals to help ensure you can sustain those withdrawals throughout retirement, consider meeting with a financial consultant.

Other retirement income sources

Social Security

While Social Security is typically not enough for retirees to live off on its own, it can be used for a significant portion of your retirement income. Despite fears that Social Security may be taken away, that is unlikely, as there are many solutions to bridge the deficit in Social Security revenue that would, at worst, result in modest reductions to benefits, not entire removal.

The exact amount you’ll receive from Social Security varies based on your average income over your 35 highest earning years and the age you begin claiming Social Security. Ssa.gov has tools that help you calculate your estimated benefit.

Want more information on how Social Security can factor into your retirement plan? We’ve got you covered.

Pension

Some employers still offer pensions to their employees, though it’s less common today than it was in decades past. Most pension plans give retirees a fixed amount of money every month, so they’re a great way to help pay for retirement expenses reliably. Still, for those that have one available, a pension can be an invaluable resource to receive a fixed income in retirement. Pension plans vary, so it’s worth looking into the details of yours if you have one available.

Part-time work

Retirement and work sound like opposites, but they don’t have to be. In fact, according to CNBC, only 71% of retirees said they’re not working in any capacity. Some retirees may still work part-time out of financial necessity, but others simply find working part-time fulfilling and a good way to occupy time. If you need a little boost to round out your retirement budget, this can be a great option.

Whether you’re preparing to retire or just starting your career, it’s never a bad time to think about your potential retirement income streams. Both income-producing products and systemic withdrawals can serve as substantial sources of income, as well as Social Security, pensions and part-time work. As always, check with a financial consultant for the best advice tailored to your specific financial situation.