Traditionally, there was a model of retirement planning known as the “three-legged stool.” In that model, people would rely on three sources of funding to cover their costs once they retired: a pension, Social Security, and their personal savings. With Social Security’s trust funds emptying more quickly than previously projected and pensions largely evaporating, that three-legged stool clearly isn’t as stable as it may have once appeared.
Still, if you want to retire, you’ll need some way to cover your costs. With that in mind, these five unexpected sources of retirement income just might do the trick to help you cover your costs in your golden years.
No. 1: Work a little
Just because you’re reached a certain age doesn’t mean you have to stop working for a living. For instance, Warren Buffett is 91 years old and still serves as CEO of a giant company. You might want to leave the rat race and focus instead on a more personally fulfilling although less well-compensated role, but you can still collect some paycheck for your efforts.
Working a bit can help in several ways. The income and any potential benefits are of course nice. It also puts structure in your day and can give you some form of social outlet. There’s even some research that suggests some people who keep working might live longer than those that completely call it quits earlier.
In addition, the later you wait to start collecting your Social Security — up until age 70 — the higher your monthly benefit check will be. If working just a little bit longer gets you enough cash so that you’ll get a larger Social Security benefit, it can help you shore up your ability to cover your costs once you do call it quits.
No. 2: Downsize your living arrangements
If you live in a home that you bought to raise a family and assure your children got strong educations, you might be living in a giant source of cash to cover your costs. If you downsize to a smaller house in a lower-taxed community, you can free up money in several ways.
First, downsizing your home will likely reduce your ongoing upkeep and maintenance costs. Second, all else equal, a less expensive house will likely be taxed less than a more expensive one. If you also actively seek out a lower-taxed community, you can even get a bigger benefit. And of course, any equity you free up from downsizing is money you can put to use to cover your future retirement costs.
No. 3: Rent out a room or two
If downsizing is impractical, could you potentially rent out a bedroom or two in order to bring in some much needed cash flow? In addition to the extra cash, you might get lucky and find tenants that are willing to help out a bit around the house.
Becoming a landlord does involve costs and risks, and you will have to do things like depreciate the part of the property that you’re renting. Still, the money can go a long way toward helping you cover your costs once you’re no longer drawing a paycheck.
No. 4: Your Health Savings Account
Although the primary purpose of a Health Savings Account is to help you cover your out-of-pocket healthcare expenses, it can also serve as a source of funding for your general expenses in retirement. Once you reach age 65, you can take penalty free withdrawals from your Health Savings Account for any reason.
That makes Health Savings Accounts very similar to Traditional IRAs from a tax perspective for those age 65 and up. There are still a few key differences, though. For one, Health Savings Account withdrawals to pay qualifying medical expenses will still be tax free. For another, there are no required minimum distributions for Health Savings Accounts. And for another, you cannot roll your Health Savings Account into a Roth IRA like you might be able to roll your Traditional IRA balance.
No. 5: Substantially lower costs of living
As the old saying often attributed to Benjamin Franklin goes, “a penny saved is a penny earned.” Many people find that as they reach retirement, their costs of living — other than healthcare — drop. If your house is paid off, your kids are independent, and your costs of working go away, your available cash just might go farther than it did before.
In addition, once you stop earning a paycheck, you’ll stop paying the Social Security and Medicare payroll taxes, as those are only levied on salary or contractor style income. Plus, without the time pressures of work, you may have more time to handle tasks that you used to contract out — like potentially cooking, cleaning, and basic home maintenance. That can also help your money go further.
Lower costs and lower taxes help your money go farther, allowing you to live a comparable lifestyle on less cash. That can feel like a boost in income, even if in reality you’re just reaping the benefits of lower costs.
Start planning today for your retirement
Unless you’re one of the few for whom the traditional three-legged stool of retirement planning will still provide a comfortable lifestyle once you stop working, you need a plan that can get you there. Whether you expect to use one or more of these five unexpected sources of retirement income or forge a different path there for yourself, the important thing is to make progress toward your goal.
The sooner you get started, the easier and more likely it will be for you to get to a place where you can cover your costs in your retirement. So get started now, and improve your chances of reaching financial comfort that lasts through your golden years.
