This post will conclude the “Five Key Money Principles” series.
Fourth Key Money Principle: Develop multiple streams of income.
The more streams of income you have, the more likely you will be contented in retirement. Creating multiple streams of income during your working career is a great benefit and provides a great sense of security. But, having multiple streams of income in retirement is even more important with regard to your financial security and overall contentment in retirement.
As early in your working career as you can, begin developing various sources of potential income that can grow over time. Studies have shown that over 85% of Contented Retirees have more than one stream of income and most have three or more streams of income. Approximately 60% of miserable retirees have only one stream of income during retirement.
The more streams of income you have, the larger your investment nest egg will be. Another benefit of having multiple streams of income is more and larger predictable and dependable sources of income, which reduce the need to withdraw income from your investment nest egg. This, in turn, means that your investment nest egg can continue growing, and this means that you can have more income in the future. If you have more income in the future, you do not ever have to worry about being able to continue to live the lifestyle you have chosen for your retirement. You will have even more money to do those wild and crazy things you have a passion for.
What are some of the multiple streams of income?
A married couple may have two Social Security checks each month. Often, these two checks will total $3,000 to $4,000 or even more per month.
Another stream of income may be one or more private or government pensions, such as military retirement, teacher retirement, or other type of government pension. These private or government pension amounts can range from a few hundred dollars to $2,000 or more per month. Another stream of income is generated by one or more retirement plan, such as a 401(k) plan, IRA, Roth IRA, Simple IRA, SEP or other form of retirement plan. Remember, for each $240,000 properly invested in these retirement plans, you can expect $1,000 of income per month.
Another stream of income is generated by your non-retirement savings that also are properly invested. In many cases, non-retirement savings are supplemented by money that is inherited or gifted from family members.
Still another stream of income may be from a part-time job or income generated from a hobby activity. Income from this type of activity can generate from $500 to several thousand dollars per month.
It is not uncommon to generate $6,000 to $10,000 or more income per month for a married retired couple. It is important to remember that prior to retirement, any of the streams of income you are receiving should be added back to your investment nest egg so that you will have a larger stream of income when you retire. (Some of your streams of income do not come about until you actually retire.)
Many people are concerned that they will not have enough income when they retire so they invest in commercial or residential rental properties with the goal that by the time they retire they will have the properties paid off and the rental income net of expenses will become another stream of income to supplement their retirement monthly income needs. The sooner you begin accumulating rental properties, the greater the income stream will be when you retire.
How much retirement income do you need to be a Contented Retiree?
Studies have shown that retirees who have $84,000 income or more per year or $7,000 per month are much more likely to be contented. These same studies have found that retirees who make $60,000 or less per year or $5,000 per month are much more likely to be miserable in retirement. Those retirees who have $7,000 to $8,000 or even $9,000 per month typically have three or four streams of income.
For most retirees, the largest and most predictable stream of income is Social Security with usually two streams of income for a married couple. Social Security is usually 35% to 45% of their retirement income. Sometimes, the married couple will have one Social Security income stream with a pension or some form of government benefit as a second stream of income. In this case, the two streams of income will still total 30% to 45% of the couple’s retirement income. Anyone who is a double or triple dipper in any of these types of income streams will usually be in good shape when they retire.
The next largest stream of income for a retiree generally is a part-time job or a hobby that produces regular income. Part-time income usually contributes from 10% to 30% of the total income for a retired couple.
Income generated from invested assets either held in some form of a retirement account or a taxable account is usually the second-largest or in some cases the third-largest stream of income. Those retirees who have saved $500,000 or more will generate $2,000 or more per month or 20% to 30% of the total stream of monthly income. Those retirees who have inherited money or who have been especially good savers and accumulated $1,000,000 or more will generate $4,000 or more in income from invested assets, and this stream of income will then make up 40% to 50% of the total stream of income.
Those retirees who have invested in rental real estate often generate $1,000 to $3,000 net income each month, and this will make up 10% to 30% of the total monthly stream of income.
However you combine several streams of income, it is critical that all of these combined income streams equal or exceed the monthly retirement income needed by the retiree. The more streams of income, the more likely the retiree will feel secure; the more secure the retiree feels, the more likely that retiree will be contented.
Fifth Key Money Principle: Become an income investor.
Is income investing the only correct way to invest? The answer is NO. There are many different investment strategies. Reasonable people can differ on what is the best form of investing, but, when you are planning for retirement or you have retired, income investing brings a level of predictability to your investing that is often comforting and provides a feeling of security.
Income investing is a method of investing that generates regular and dependable amounts of income from your financial assets. This income comes from dividends from stocks, interest from bonds or other fixed income assets and distributions from a variety of assets such as REITs, master limited partnerships, energy royalty trusts, etc. Money from dividends, interest and distributions provide your portfolio with an annual yield or cash flow. The predictable cash flow is what you can live on without worrying about the up and down market value of the investment assets.
Whenever possible, invest in assets that produce a regular and predictable income stream.
If this sounds attractive to you, check with your investment advisor and begin arranging your assets to ensure that you have a continuous income stream from your investments.
With this information, you need to begin “walk the walk” rather than merely “talk the talk”. All these concepts and ideas are worthless to you unless you do something to begin to implement these ideas and strategies. Position yourself to be a Contented Retiree and you will never run out of money.
You just need to start.