Expenses don’t end when retirement begins, and many studies show that pre-retirees and retirees are worried, if not terrified, about outliving their savings and footing the bill for exorbitant medical costs.
Many studies also show that an alarming proportion of baby boomers rapidly approaching retirement have very little saved to cover the costs of their retirement and are counting on Social Security to keep them afloat during their golden years.
But that strategy may leave millions of people in the red when unexpected expenses crop up. And with the miniscule bump in Social Security benefits in recent years, even everyday expenses could quickly sap a retiree’s Social Security check.
While many older retirees still benefit from a company pension, those approaching retirement today are increasingly unlikely to have a pension to tap into during retirement. This leaves retirees who haven’t saved adequately or at all in an unnerving position just when they should be reaping the rewards of decades of work.
Luckily, there are several options for retirees to generate income to pay for expenses or perhaps fund a retirement goal. Retirees could jump on the crowdfunding trend or look for creative opportunities, like wrapping their car for advertising revenue. Or they might look for ways to make money by saving money via couponing or by accessing cheaper dental care over the border.
Read on for seven additional ways retirees can generate income in retirement:
There are several traditional income streams that retirees should consider. (Photo: iStock)
1. Access traditional income streams
Retirees have a few traditional sources for income during retirement, the most obvious of which is Social Security. In fact, many retiring baby boomers are counting on Social Security as their only source of income during retirement, according to research conducted by the Insured Retirement Institute.
Some pre-retirees and retirees also can count on a pension to provide a set monthly payment for the remainder of their life. But pensions have been largely replaced by finite defined-contribution plans that pre-retirees fear they will outlive.
To protect against the risk of longevity, some retirees turn to annuities to generate a lifelong stream of income.
Related: Annuities for retirement income
“That’s usually very safe, guaranteed income, but in today’s world typically has a lower yield,” said Patrick Meyer, director of Wealth Management Client Services at Unified Trust Company in Lexington, Kentucky. “Another traditional approach is looking at various securities that offer some form of dividend or yield associated with it, such as buying bond mutual funds or individual bonds, dividend-paying stocks, mutual funds that focus on real estate investment trusts (REITs) and even preferred stocks. These kinds of securities offer some kind of return that you can enjoy on a monthly or quarterly basis and also hopefully have your principal investment intact as well.”
Meyer said the downside to many of these traditional income-generating investments is that the yields are not very high in today’s historically low-interest-rate environment.
“I don’t think we’re going to be in this environment forever — maybe a few more years — but it’s probably not going to be forever,” said Meyer. “It’s a little frustrating for folks right now who are trying to get as much as they can from their savings.”
Waiting to claim Social Security can translate into substantially higher benefits. (Photo: iStock)
2. Delay claiming Social Security
Social Security figures prominently into most people’s retirement income plans, but many may not be aware that they can significantly increase their monthly Social Security income by delaying when they start taking Social Security benefits.
According to the Center for Retirement Research, delaying claiming until age 70 increases Social Security benefits by at least 76 percent for workers born between 1943 and 1954. This is because of an actuarial adjustment that aims to ensure the expected present value of lifetime benefits for workers with average mortality varies little by claiming age.
The actual benefit may be even more substantial for certain groups of people. Those who elect to work beyond their expected retirement age are more likely to work at the peak of their earning potential if they delay retirement for a few years and often will increase their career average earnings, which in turn will increase their Social Security benefit.
In addition, women are more likely to have years of zero or low earnings due to staying home with children and can benefit by extending work and pushing up their average earnings. As a result, men who extend their career and delay Social Security can expect to increase their benefits by 82 percent, while women on average can increase their Social Security benefits by 88 percent.
The problem with delaying Social Security, however, is that in many cases people have to find a way to fill in an income gap between when their job income ceases and when their Social Security income begins. Some advisors recommend tapping into 401(k) and IRA savings during this gap.
In addition, people often feel like it’s better to start taking Social Security as soon as they can because they don’t know how long they will live and they want to make sure they get as much of the benefit they’ve earned as they can. Either way it’s a gamble.
There is a middle ground, however, because delaying Social Security is not an all-or-nothing proposition. Delaying Social Security by just one year increases benefits by at least 7 percent, according to CRR.
Retirees might consider returning in a consulting role to a previous employer or seek out a part-time job related to a hobby. (Photo: iStock)
3. Tap into the gig economy
The rise of Uber has highlighted the viability of short-term jobs, or gigs, for all ages. Retirees wanting to generate an income stream through employment can tap into the gig economy, or look for part-time or seasonal work to supplement their retirement income streams.
Retirees are ideal for some gig economy jobs because they are likely to have a flexible schedule that works well for opportunities like Uber. Other gigs that retirees might be interested in include tutoring, babysitting, dog walking or mystery shopping.
Related: Beyond a traditional retirement
Retirees might also leverage their career skills to consult in their former industry or with previous employers, or seek out freelance opportunities that fit their skills. Jobs that align with a retiree’s hobbies allow them to generate an income stream while doing work that is personally fulfilling.
According to the Bureau of Labor Statistics, 33 million Americans over the age of 55 were employed in 2015 and 1.3 million were actively seeking work. Workers over the age of 65 outnumbered teenage workers in 2015 for the first time since 1948, and median weekly earnings for men were $1,069 and $781 for women aged 55-64.
A reverse mortgage allows retirees to unlock the wealth in their homes. (Photo: iStock)
4. Get a reverse mortgage
“For most people, the bulk of their wealth is in their home,” said David Johnson, a finance professor at Maryville University in St. Louis.
Homeowners can unlock equity in their home by refinancing their loan or obtaining a home equity line of credit, each of which requires payments or repayment in full if the property is sold, he said. But another option is a reverse mortgage loan, which allows the homeowner to access a portion of the equity in their home without having to make monthly mortgage payments or vacate the property.
Reverse mortgage loan borrowers have to go through a light financial assessment to ensure they are able to cover their property taxes, homeowner’s insurance and other loan obligations, said Johnson, and the homeowner retains the title to the home.
The loan comes due when the homeowner passes away, leaves the home permanently, sells the home or is otherwise unable to meet their loan obligations.
The government-insured Home Equity Conversion Mortgage, which make up for more than 95 percent of all reverse mortgage loans, have a unique non-recourse feature. This means that if the loan amount due exceeds the value of the home at that time, the homeowner is not responsible for paying the difference.
This can be a major advantage for both homeowners and their heirs, said Johnson. The amount of proceeds available to a homeowner in a reverse mortgage depends on the age of the youngest borrower, the current interest rate, the value of the home and how much equity has accrued, he said.
Reverse mortgages have been around for more than three decades but initially weren’t a popular option because the rules governing the loans allowed lenders to share in the increasing value of the property over the life of the loan, which reduced the benefit to the homeowner. Once rules were revised to eliminate shared appreciation, reverse mortgages became more beneficial to homeowners and began gaining popularity in the early 2000s.
There are many misconceptions around reverse mortgages, said Johnson, including that they are complicated, that the bank becomes the owner of the home, that the property can’t be left to heirs, that the homeowner can’t sell the property and that refinancing the loan isn’t possible. None of these are true, said Johnson.
Reverse mortgage loans have safeguards in place to address these claims and better serve the family of the borrowers. For example, eligible non-borrowing spouses are allowed to remain in the home after the borrower of an reverse mortgage loan passes away, as long as the spouse also meets the conditions of the loan.
Additionally, an heir or the executor of the estate can choose to sell the home and use the proceeds to repay the loan. In this case, the remaining proceeds from the sale can be split among the heirs. The heirs also have the option to repay or refinance the loan and keep the home in the family.
But retirees should be careful when considering a reverse mortgage to ensure they are making an educated decision. Johnson said homeowners shouldn’t allow anybody to pressure them to do a reverse mortgage. “There’s no need to make a quick decision,” he said.
Homeowners also should be aware of how the loan works, and elderly people considering this option should involve a trusted family member or trust to ensure the loan is executed properly and ethically. Retirees also should be aware of the specifics of the loan, which could outline occupancy requirements and other terms that could cause the loan to come due.
Johnson said retirees typically use a reverse mortgage to supplement income during retirement, although some retirees may use a reverse mortgage to provide an income stream while they delay their Social Security claim, or to pay for medical bills or long-term care expenses.
Buying and renting a property creates an income stream while protecting the original investment. (Photo: iStock)
5. Become a landlord (or bank)
Buying a rental property is one of the more creative ways to generate a monthly stream of income if a retiree has the financial ability to invest in a property.
“People do that on an individual basis by buying a home or commercial property in their neighborhood,” said Meyer. “Or there are other avenues to do this in the realm of private lending. I may make a loan to a small business, family member or friend and essentially I become the bank and lend money with interest. If everything goes well, I’ll get the principal back.”
Retirees considering this income alternative need to evaluate if it fits their lifestyle and tolerance for risk, said Meyer.
“You lend funds to someone and all of a sudden those funds are illiquid and you’re taking on a higher degree of risk than what you might be comfortable with,” said Meyer. “Becoming a landlord also entails a lot of other concerns that might not be to their liking.”
The timing may be ideal to explore this income-generating possibility. Rising home prices and a millennial generation eager to rent are combining to create a growing opportunity for retirees to join the ranks of landlords.
According to Bankrate.com, owning a rental property offers several benefits, including a monthly income stream, tax advantages, increasing rents over time and the ability to fix mortgage costs. On the downside of rental property, however, is the cost of property expenses and upkeep, deadbeat tenants, loss of income from unrented units, and the illiquid nature of the asset.
Parting with unused or unneeded items provides cash and other benefits. (Photo: iStock)
6. Sell off unused assets
Another way retirees can generate income is to have a garage sale. Kind of.
“It’s really the notion of converting underutilized assets into a stream of income,” said Meyer. “That may be something like if I own land somewhere that I’m not doing anything with, I might try to rent that out or lease it. Another thing I might do is look at all of the stuff that I own and I might sell some of my unneeded, unwanted or unused stuff.”
In addition to generating cash or an income stream, offloading unused assets can save retirees money in terms of space, utilities, insurance costs and time spent managing items they no longer want or need.
“If you think about things from that perspective, that’s a way to free up time, money and energy, which are also valuable for retirees,” said Meyer.
He said retirees should consider monetizing collectibles they have lost interest in, business assets they may have left over from their career, equipment they no longer use or cars they no longer need.
“There’s always a secondary market for things,” he said.
Another upside to downsizing is that it eases a transition retirees often face when decide to or must move a large home to a smaller home or retirement community. Deciding what to do with all their stuff can be overwhelming for retirees if they haven’t taken the time to cull their possessions, said Meyer.
Cash, publicly traded securities, some types of closely held stocks, real estate and other complex assets are among the assets that can be donated to a charitable remainder trust. (Photo: iStock)
7. Give money to charity
A charitable remainder trust provides a vehicle for retirees to create an income stream while benefitting a favorite cause.
“This is ideal for converting low basis, highly appreciated assets into an income stream,” said Meyer. “Let’s say that I owned $200,000 in a certain stock and my cost basis in that is $10,000 or $20,000. If I sold all that I would recognize a large capital gain that I would have to pay taxes on.”
Instead, Meyer said a retiree could establish a charitable remainder trust and gift the stock to a qualified charity. In exchange, the retiree could take an income stream for a set period of time from the stock while not having to recognize all of the taxes. They may actually benefit from a potential tax deduction for a charitable contribution, he said.
“Whatever is leftover at the end of that term passes to the charity, and that’s the value of the charitable contribution, said Meyer. “It’s probably not for everybody, but for some folks it’s a valid approach, particularly for those who have tax concerns.”
Among the assets that can be donated to a charitable remainder trust are cash, publicly traded securities, some types of closely held stocks, real estate and other complex assets, according to Fidelity Charitable.
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