Back to Basics: Popular Ways to Fund Your Retirement

Most people do not want to spend their entire life working. Or, at the very least, would like to reach a point where they no longer need to rely on income from employment. However, if you do not make a plan for retirement income, you may need to work far longer than desired. If you are not planning to work in retirement, you will still need a way to make money so you can afford to live. This means having enough money to cover the basics like food, housing, and medical care, at a minimum (and you will likely need money for many more things than these basic necessities).  Below are a few of the most popular options that you can use to create retirement income. 

Social Security

Social Security is the most common way Americans pay for retirement, and historically many Americans have counted it as their main source of income after leaving the labor force. However, Social Security currently is in deficit spending, and a majority of working Americans don't expect Social Security to play a large role in their retirement budget, either due to concern of it not being around, or it not replacing a significant enough portion of their income. On average, Social Security is designed to replace about 40% of a worker's wages¹ during retirement. Given how only a certain amount of income is taxed (up to $142,800 in 2021), higher-income individuals may see just 25% of their income or less replaced by Social Security. Thus, it is becoming increasingly important to save on your own to build a nest egg outside of Social Security.

401(k)

One option that many workers take advantage of is their employer-sponsored 401(k). If your current employer offers a 401(k) and you’re not contributing to it yet, you'll want to start immediately.  One reason why this is such a great option is because many employers offer a match, meaning any money that you put in will also be added by your employer. You can choose to invest up to the match or max it out based on the current IRS regulations every year ($19,500 for 2021 + an additional catch-up of $6,500 if over age 50²).  If you can't stomach the idea of less take-home money in your paycheck, start small. Contributing just 1 or 2% won't seem like much at first (and you might barely notice the difference), but it is better than nothing. After a few months, up the percentage, and continue doing so, until you reach the max allowed by your employer, up to the IRS limits noted above. 

IRA

Another good option for investing money earmarked for retirement is an Individual Retirement Account (IRA). This is a personal account that you can create that is separate from your employer. Just like a 401(k), there are IRS limits² regarding how much you can actually put into this account every year. If you can, it is a good idea to max out this account. You can also choose between a tax-deferred IRA or a Roth IRA where you contribute after-tax, the account value grows tax-free until retirement, and then withdrawals are tax-free as well. There are also income limits with each type of IRA that you will need to be aware of when choosing. Deciding which account is best for you may be a good thing to discuss with your financial planner. 

Real Estate

While it is not always a very common form of investing, if you are looking for a way to generate retirement income every month, investing in real estate may be a suitable option. If you can pay off the debt on rental properties in full before you retire, then you can take the rental income from each property as retirement income every month. How many properties you obtain is completely up to you and your means, but remember that there are situations where you may be without a tenant for a few months, there could be other expensive updates to the property you need to make, or the area around the properties may become undesirable by tenants in which case you may need to reduce the rent to attract new tenants. These are just some of the risks that come with real estate investing, just like with any other form of investing. Nonetheless, it could still be a suitable way to get retirement income for your situation.  Another option is selling the properties for income when you retire. In that case, you could reinvest the funds and withdraw them throughout your retirement years.

If you're reading this, you know that you eventually will want to retire, or reach the point of no longer being reliant on a paycheck without having to worry for what the future holds. With thoughtful and careful financial planning, you can reach that goal and live out a successful retirement lifestyle.