Seniors gearing up for retirement have a difficult task ahead of them: planning out an entire retirement’s worth of finances. While many soon-to-be retirees are well on their way to a financially stable and comfortable retirement, many don’t fully realize where all of their retirement funds come from to begin with. It’s important that those who are looking towards their retirement understand where all the money comes from to support their lifestyles in their later years.
For most retirees, income is typically comprised of 4 main sources:
- Retirement Benefits
- Social Security
- Part-Time Work
- Income from Assets
These include both retirement funds, like 401(k)s, and earned pension benefits. Not everyone has a pension plan to rely on, which leaves them with the retirement funds they’ve managed to save up throughout their adult lives as a main source of income. However, as many as 1 in every 3 Americans have neglected to invest in a retirement fund, leaving them with little options when it comes to supporting themselves throughout their retirement.
It’s a common misconception that retirement benefits are the sole source of income that retirees have to depend on. However, lifestyle is often determined by the benefits they’ve managed to build throughout their lives. Benefits are largely based on the amount of time and money invested into the retirement fund while the retiree was still working. Even working for an extra year or two can make a difference in the fixed income rate during retirement.
Most retirees draw from Social Security in order to make a living through retirement. In fact, 85% of retirees rely on it, with 51 percent of married beneficiaries and 74 percent of non-married beneficiaries reporting that Social Security benefits are a major source of their income. So many working folks are under the impression that even without retirement plans in place, Social Security benefits alone will get them through their retirement years. However, as of August 2016, close to 44 million retirees receive monthly benefits, which average out to $1,305.30 per individual. For those planning for retirement now, it’s important to understand that while Social Security does provide a very vital and necessary financial benefit to retirees, it’s not even close to expected monthly cost of living for the average retiree. In fact, on average, retirees are spending about $3,700 monthly, making their Social Security benefits just enough to cover the anticipated costs of housing alone. Of course, with the Social Security Trust Fund expected to be completely depleted by 2034, today’s seniors should be preparing to offset the expected 25 percent drop-off of benefits.
As it stands today, only about a quarter of retirees are working during their retirement in order to supplement their finances. However, continued work after retirement is becoming increasingly important for many seniors. In fact, 67 percent of workers and retirees plan to work for pay in their retirement. That anticipated number is drastically higher than today’s number, and this is largely due to unexpected high medical expenses or smaller retirement benefits. However, there is a percentage of these retirees who choose to work, regardless of the financial benefits, in order to maintain a sense of accomplishment. Truth be told, many retirees often look for ways to fill their newly granted free time, and part-time work often lends itself to be both productive and financially beneficial.
Many retirees wish to hold onto assets during retirement. Asset income from rental income, royalties, dividends, and interest has been in decline for over 30 years, but those who maintain asset incomes often have better retirement funds. When it comes to their assets, of course, seniors need to make a choice between managing and protecting existing assets or selling them in order to increase their funds. This becomes especially important to think about when considering that inflation will have an effect on their funds in the future.
Many seniors aren’t fully aware of all the income sources they have for their retirement, especially when it comes to their assets. These assets include existing assets that generate income or they may own assets that they can sell in order to pad their retirement fund, like a life insurance policy. Through a life settlement, a policy holder may sell an unwanted or unneeded policy in order to receive a sum of money that is larger than the policy’s surrender value.
Leo LaGrotte is the founder, president and CEO of Life Settlement Advisors.