In today’s world, workers can no longer rely on company pensions to get them through retirement. While this change in the traditional order of things can be stressful, it also provides opportunities for alternate retirement strategies. In this article, we will discuss four alternative ways to fund retirement.
Alternative One: Early Retirement
Retiring early is a dream for many people, and can be a real possibility through early planning and a commitment to the sacrifices required. Planning for early retirement is a lifestyle choice and will require discipline to save up the necessary money. There are two basic ways to go about retiring early: saving up a lot of money, or developing alternate sources of income.
The key to the savings approach to early retirement is to be able to consistently sock away a significant amount of money each year. For example, someone retiring at age 45 who expects to need about $5,000 a month during a retirement of 40 years will need approximately $1,000,000 saved up at retirement. In order to save up this much, he or she will have to save $25,000 each year starting at age 25 and have an average investment growth rate of 7% each year. That same investor could reduce the annual savings requirement to $10,000 by holding off on retirement until age 50.
Saving up enough to retire early can be accomplished in a few different ways. Most people in this category have high-paying careers and can discipline themselves to avoid lifestyle creep. It can be hard giving up new car purchases and lavish vacations, but the end result can be ditching the working world for a relaxing early retirement. Some people choose to work a second job in the evenings and weekends or live on one spouse’s income while saving the other. The overarching theme is to commit to living well below one’s means in order to be able to save a lot of money.
If saving $1,000,000 by age 50 isn’t in the cards for you, then you can still come up with alternate sources of income to fund your retirement strategy. This is often a good idea even for those not planning to retire early so that they can reduce reliance on investment income. The most popular sources of income during retirement according to AARP are income from rental properties and royalties from a business. Rental properties can be an excellent source of income for those who live in hot rental markets (like around universities) and can commit to the hassles of being landlords. In order to be successful, landlords must have most (ideally, all) of the mortgage paid off on both their own home and the rental to reduce the risk of being squeezed financially by a bad rental year. If you are a business owner or salesperson, you can often sell your book of business in exchange for a lower lump sum and royalties down the road.
Alternative Two: Traditional Retirement
Most workers today are looking forward to a traditional retirement in their 60s after having worked most of their lives. For most people today, retirement is funded by a combination of Social Security income, 401(k)/pension/IRA investments, and through home ownership.
The key to this style of retirement is a combination of consistent saving, taxable work (to pay into Social Security), prudent investment decisions, and a paid-off mortgage. For example, a worker planning to retire at age 65 needs to save at least $5,000 per year (a standard IRA contribution) beginning at age 25 which needs to grow at 7% each year in order to be able to withdraw $36,000 per year during retirement. While $3,000 per month in income may not seem like a lot of money, consider that Social Security income will increase your income and you will not have a mortgage payment.
Frankly, in addition to saving for retirement, owning your home is probably the most important thing you can do to aid your retirement. Paying off a mortgage before retiring takes a huge monthly financial burden off the table and ensures you always have a place to live. If necessary, you can sell your house later in life to fund a move to assisted living.
The major source of anxiety for retirees living off investments and Social Security are rising health costs and financial downturns which can negatively affect investments. The best way to combat these fears is to plan retirement expenses carefully, always leaving room for reduced investment growth, and explore alternate sources of income during retirement.
Alternative Three: Frugal Retirement
A third option for retirement is a frugal, bare-bones strategy designed to reduce post-retirement expenses by as much as possible so as to live mostly on Social Security income. This option might not be the most comfortable one, but it might suit people who have not adequately saved for retirement or as a back-up plan for those concerned about investment performance.
While many people assume that their living expenses will shrink during retirement, planning ahead for a retirement budget is crucial to determining what expenses will need to be cut to meet income constraints. Check out our article on How to Budget for Retirement for some helpful information on how to begin the process.
The best way to drastically reduce expenses during retirement is to own a fully paid-off home in an area with a low cost of living. Through budgeting and careful planning, retirees can live solely on Social Security income.
For the more adventurous, leaving the US and moving to a developing country can present an excellent compromise between reducing expenses while living a comfortable lifestyle. For example, Nicaragua, which has topped the list of desirable retirement destinations for several years, is a super cheap place to retire. Houses in several expat enclaves can be had for $20,000, while monthly expenses (including maid service!) can average around $500 per month. This lifestyle is very affordable on US Social Security income. Compare this to the cost of living in the US and you can see why many retirees are choosing to move overseas.
Alternative Four: Partial Retirement
More and more retirees are choosing a partial retirement in which they work part-time or develop a second career. Depending on your financial needs or ambitions, you can make a partial retirement as stress-free or demanding as you like. Some workers with years of experience in a career choose to open a business or consult for companies in their field. Others choose to indulge dreams of taking their hobbies to a professional level. Still others decide that low-stress part-time jobs in the retail or restaurant business provide enough income and stimulation to suit their needs.
Whichever job or second career you choose to pursue, a partial retirement can offer the benefits of a more relaxed, self-directed lifestyle with extra income. This can mean an earlier retirement, less reliance on investment income, and a better retirement lifestyle.
Depending on your financial needs, you may find it best to start out by retiring from your first career and working a new job, and then transitioning to a full retirement. Doing so can give your investments longer to grow before you begin withdrawals; also, by waiting longer to take Social Security income, you increase your monthly income.
Don't Put It Off, Jumpstart Your Retirement Plan Today
A comfortable retirement can only be secured with prudent planning, aggressive saving, and disciplined investing. Online research is a good start, but consider the benefits of discussing your options with a qualified financial advisor. The alternative could mean lost opportunities, higher fees, and lack of discipline. Request a free, no-obligation consultation today.Speak with an advisor over the phone about your retirement plan for FREE.