Retirement Planning: The 10 Biggest Sources of Retirement Income

During your working life you will likely have one main source of income, your job. Your life in retirement will likely be quite different with multiple sources of income. Once in retirement, this becomes a good thing. Not having all your eggs in one basket makes your retirement income safer and less susceptible to the fluctuations of the economy or the whims of the government.

That is, if you have adequately planned and prepared for your retirement. A recent Gallup survey detailed the 10 most common sources of retirement income. The numbers also reveal that many Americans are putting their retirement income hopes in the wrong places or are not planning adequately for their retirements all. Read through the results of the survey and see if you think your retirement plans will hold up.

Social Security - The Gallup revealed that 54% of retirees state Social Security is a major source of income of income in retirement. Approximately 34% of those currently working expect Social Security to fund the majority of their retirement. This is the highest percentage Gallup has recorded in this 10 year-long annual survey.

This is disconcerting since the Social Security Administration predicts it will begin running a deficit in 2016. That is less than 6 years from now! Trust fund assets will allow payment of full benefits until they run out in 2037 at which point the tax base will support only approximately 75% benefits through 2083. Of course, each year these projections become worse as the economy fails to rebound. Remember that as the baby boom generation continues to retire in increasing numbers the number of workers contributing to support Social Security grows smaller and smaller.

Retirement Accounts - Approximately 45% of Americans plan to fund their retirement with a retirement account of some type. These include 401(k), 403(b), IRA, Keogh, TSA and other such accounts. This number was down from 52% just 3 years ago.

Participation in most retirement account plans is purely voluntary. Too many people elect not to participate at all, elect to participate too late in their life or contribute too little to their retirement accounts for them to comprise a significant portion of their retirement income. The Gallup survey reveals that only 22% of current retirees expect their retirement account withdrawals to be one of their major sources of income during retirement. Start early and contribute as much as possible for as long as possible is the recipe for success here.

Pensions - An all time low of 23% of current workers expect to receive income from a formal pension plan during retirement. That number is down 8% from 2007. Fewer and fewer companies are offering pension plans at all and those being offered to new workers offer less generous payouts than before. While a majority of baby boomers' fathers benefited from a pension plan only about 37% of current retirees receive a pension.

There is not a whole lot individuals can do about this. If your company doesn't offer a pension, they don't offer a pension. This is all the more reason everyone needs to participate in their own retirement account plans.

Savings Accounts and Certificates of Deposit - A paltry 13% of people currently in retirement are using their savings accounts and certificates of deposit to fund their retirement. Meanwhile 22% of those currently working hope to fund their retirement this way. Unfortunately, until the recent economic collapse Americans were saving at a negative rate. That meant that as a group we were borrowing more money than we saved. One of the few benefits of the market collapse was it scared Americans enough to stop spending and start saving. For the first time in decades the American savings rate crept back into positive territory. In light of these numbers is it realistic to believe that nearly 1 in 4 Americans will be disciplined enough for long enough to save for their own retirements?

Stocks and Mutual Funds - With the recent economic crisis and stock market crash, many people are hesitant to invest in the stock market for retirement purposes. Currently, 1 in 5 workers believe that stocks and mutual funds will provide a significant percentage of their income during retirement. This is down from a whopping 24% in 2007, just before the market crash. Approximately 14% of current retirees use stocks or mutual funds to pay for part of their living expenses.

There can be tax advantages to holding stocks outside of your retirement accounts. Distributions from traditional 401(k) and IRAs are typically taxed at normal income tax rates while equities are usually taxed at the lower capital gains rate.

Home Equity - Your home equity can be a source of income for retirement planning. However, with the recent housing market bubble burst a majority of homeowners have much less equity than they had just 2 years ago and many find themselves underwater as the real value of their home has fallen below what they owe on their mortgages.

As a result, the number of workers planning to use their home equity as part of their retirement fund has dropped from 30% in 2007 to around 20% today. That number is exactly the same as the number of current retirees using their home to fund their retirement.

Part-time Work. An estimated 18% of those currently working believe they will work part time in retirement. Many because they will have to and others because they choose to. That number is up from 10 percent in 2001. Holding a part-time job may be a necessity for those that failed to plan adequately for retirement. Whether you must work or choose to work in retirement, you must consider that it will be harder to find such employment at retirement age and that you must remain healthy enough to continue working. And remember, these factors are not often under your control.

Of course, in this internet age we have different options for part-time work that didn't exist until recently. Internet, niche marketing as well as other online service businesses abound. With some education and hard work reliable streams of income can be developed for a minimal investment. You can read more about the advantages of internet businesses for retirees in my hub, 'Internet Marketing Businesses are Ideal for Retirees'.

Inheritances - Of course, a rich relative leaving you a large inheritance could solve all your retirement headaches. However, less than 1 in 10 of those currently working expect to receive such an inheritance. Meanwhile only about 3% of those currently retired reported that an inheritance is currently helping to pay for their retirement. It seems more people are planning on hitting it big with an inheritance than actually do.

The bottom line is this. You can't count on an inheritance coming through and, if it does, that it will be large enough to make a difference. Your rich relative may end up living longer and burning more of your planned inheritance. Moreover, they may easily change their minds as to who should receive their fortune!

Annuities - An annuity is a financial contract providing payments for a person's lifetime. Only around 8% of both current workers and retirees report that an annuity will make up a significant percentage of their retirement income. Annuities can be complex and difficult to understand. Be sure you have a firm grasp of the benefits and requirements of your annuity plan before you proceed. It is always a good idea to have an independent financial adviser with no stake review your annuity documents before you sign on the dotted line.

Rent and Royalties - Royalty payments typically come from patents, trademarks, or copyrights on things like inventions, books, songs, etc. That patent you hold for that great widget and the royalties it produced could dry up quickly, if someone invents a better widget and people flock to buy it.  Be certain that the income from from your royalties are expected to continue for the long term before your build your retirement on them.

Those that own property may earn money from their real estate investments. Only around 5% of current retirees report that a portion of their retirement income comes from real estate investments. It is not generally considered a good idea to make rental income the majority of your retirement income but it may comprise a significant portion. Those that do derive income from rentals during retirement must continue to consider related issues such a property taxes, maintenance expenses, occupancy issues, etc. while now on a retirement income.

Conclusions

These are the top 10 sources of retirement income according to a recent Gallup survey. What this survey reveals is that most current and future retirees will have to rely on multiple sources of income to fund their retirements. This is especially true if they want to maintain their pre-retirement lifestyle.

With fewer and fewer companies offering formal pension and retirement plans, it becomes incumbent upon each of us to plan for our own retirement. It is also clear that it is important to do this planning early, start early, contribute regularly and to review and adjust these plans as necessary. Now is the time to think about these things.  Don't put it off!  With planning, discipline and a little good luck you can live in retirement as comfortably and securely as before.