What does retirement have to do with a stool? The three legged stool describes a retirement strategy of Social Security, pension and personal savings. This strategy is dated since very few employers offer pensions. What changed? Most employers replaced pensions with 401k plans where employees contribute on a pretax basis to an annual limit. These funds grow on a tax deferred basis until withdrawal.
There is a huge difference between a defined benefit plan (pension) and a 401K plan. First, you probably do not work for a company that provides a pension. If you did, you did not work there long enough to have significant benefits. Most employees do not spend their entire career with one company. The concept of a fixed sum paid to you in retirement is over! How can you have a comfortable retirement?
401K Plan – first leg
If you are just starting out, you can choose a career that offers a pension or take your future in your hands. Most people in their twenties do not think about retirement and do not contribute to a 401K or savings in general. Saving or contributing to a 401K is not required, but maybe it should be. Many employers will match your contributions to encourage participation. If you miss out on your twenties, you lost a whole decade and you only have three more to catch up.
Some companies have started automatic enrollment to make retirement savings mandatory. If your company has automatic enrollment, it is increasing participation! You are automatically enrolled unless you elect to opt out. You can change the percentage of contribution or have no contribution. Automatic enrollment cut the number of employees who normally would not participate in half. This is one way to encourage higher participation.
This is good way to make sure you have a sizable nest egg in retirement. A 401K is the first leg of my 3 legged stool for retirement! A 401K and their other incarnations including IRAs are important resources for retirement income. After a forty (40) year career, you should have one (1) million dollars in your 401K. If you withdraw just 3 or 4%, you can replace $30-40,000 of income. For some, this is a comfortable retirement. Automatic enrollment may be the answer to increase employee participation.
Rental Income – 2nd leg
The second leg of my retirement stool is rental income. If you own a home, you probably owned more than one over your lifetime. If you never sold each home and rented it out you would have rental income to support you in retirement. If you had two (2) homes rented out for a total of $2,000 a month without a mortgage, you probably will net $1,500 a month. Therefore you could replace $18,000 of income per year. My numbers are approximate, but rental income is a good way to replace income in retirement.
You may not want to become a landlord or be one in retirement. You can invest in rental property without actually owning the properties. There are real estate investment trusts in the stock market that may be substituted for rental properties. I owned income property (apartment buildings and a shopping center) and I think it is a great way to build assets and earn income. Saving and investing is the first step to providing choices in retirement. So it is up to you! Rental income is a great second leg in the 3 legged stool retirement strategies.
Social Security – 3rd leg
Normally Social Security would be your third leg, but changes are coming. They may raise the retirement age to match the higher mortality of retirees or change benefits for younger workers. Whatever the changes you can no longer depend on Social Security, if you are under fifty-five (55) years old. What should you do? I think Social Security will be there, but expect some changes. The median Social Security payment was approximately $15,000 in 2010.
Other sources of income – 4th, 5th & 6th leg
Dividends, interest, royalties, are just a few additional sources of income. Some choose to delay retirement and continue working or work part time. Many self employed people work well past the traditional retirement age because they enjoy what they are doing. They cut back on their hours, but continue their business. Still others sell their business and buy immediate annuities to provide income.
Planning for retirement should start early. Retirement is one of the most important events in your life. Using my suggestions you can have a comfortable retirement on $63-73,000 ($30-40K IRA withdrawal, $18K rental income & $15 k SS) a year in retirement income. Of course, these are approximate numbers and you should plan your own retirement. These figures do not include any additional income such as dividends, interest royalties or part time employment. How do you want to live in retirement?
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