How To Generate Income in Retirement (w/o Going Back To Work)

About a third of Americans continue working after they reach retirement age. Some of them never leave the workforce. They continue to work full-time or part-time well into their senior years.

No matter how well you prepare, you could find that you need to generate income during retirement. That doesn’t necessarily mean that you must go back to work, though. Here are some other options for how to generate income in retirement without going back to work.

Get Dividends From Stocks

Dividend stocks can generate income during your retirement by paying you a monthly, quarterly, or annual return for the number of shares you own.

Keep in mind that the amount per share is usually pretty low. Ideally, you commit to buying dividend stocks when you’re young and then reinvest the money to purchase more shares. Then, you will have a steady income when you retire.

Focus on the top dividend stocks while making sure your portfolio includes plenty of diversity. Additionally, look for companies that pay regular dividends and have shown steady growth for a long time.

A company with a high dividend payout might look like a great opportunity until you investigate its past performance. If it has a short history of success, you take a risk by investing too much money into it.

Some of the top dividend stocks to follow include:

  • 3M Co (MMM)
  • Altria Group Inc (MO)
  • Universal Corp (UVV)
  • Phillips 66 (PSX)
  • Hasbro Inc. (HAS)
  • Merck & Co Inc (MRK)
  • Chevron Corp (CVX)
  • Edison International (EIX)
  • LyondellBasell Industries NV (LYB)

These companies have attractive dividend yields, some higher than the average inflation rate. By putting your money into them, you can expect to receive regular payments that could keep pace or even eclipse the effects of inflation.

Of course, you don’t have any guarantees. Many experts believe that the inflation rate will reach 8.5% in 2022. Over the last decade, though, inflation has usually been under 2.5% per year.

Assuming high inflation doesn’t continue for long, dividend yields over 4% should grow faster than inflation, which means your money will grow rather than lose value.

Social Security Payments

On average, American retirees receive about $1,527 per month. The amount that you get during retirement depends on several factors, though, including how much you paid into the program and whether you choose to retire early.

The full retirement age depends on when you were born. Americans born between 1943 and 1954 can receive full retirement benefits at age 66. Those born in 1960 get full benefits at age 67.

Regardless of your birth year, you can retire with partial Social Security benefits at 62 years old. The amount of money you get from the Social Security Administration falls quite a bit when you retire early, though.

Someone who would get $1,000 per month during full retirement loses at least 25% when they retire at 62. At most, that person would receive $750. Those born in 1960 would only get $700 per month.

For most people, it makes sense to wait until you can retire and take full benefits. That isn’t a rule that applies to everyone, though. If you already have enough money to retire, the extra payments can make life much easier. You won’t get as much as people who wait until they reach full retirement age, but that might not matter as much to you if you’ve invested and saved well.

Defined Contribution Plans

A 401(k) is the most popular type of defined contribution plan in the United States. With a 401(k), you contribute a certain amount of money each month. In many cases, your employer will match a percentage of your contribution.

The 403(b) is another popular type of defined contribution plan. It’s similar to a 401(k), except its used by some public school teachers and employees at non-profit organizations.

There are several potential benefits to using defined contribution plans. With a 401(k), you can set up your paycheck to automatically deposit an amount you choose each month. Since you never see the money in your bank account, you effectively fund a part of your retirement with money that you didn’t consider when planning your budget.

You also get tax benefits when you invest in many defined contribution plans. With a 401(k), you don’t pay money on the amount you put into your account. Instead, you pay taxes when you deduct money from your plan. As long as you wait until retirement, you defer taxation for years and potentially decades. Early withdrawals can come with higher rates and penalties, though.

By deferring taxes, you can put more money into your 401(k) account, which means you have a larger amount that grows exponentially over the years that you work. Depending on your income level, deferring your 401(k) investment could also mean you pay a lower overall tax rate on your annual taxes.

If your income puts you right on the border between two tax rates, deferring pre-tax money to your defined contribution plan could lower your income to the lower rate. You still need to pay taxes on the amount you withdraw during retirement, but you save money now so you can invest a higher amount.

Defined contribution plans typically put caps on how much you can invest each year. In 2022, you can add up to $20,500 to a 401(k) plan. If you’re 50 or over, though, you can invest an extra “catch-up” contribution of $6,500.

The maximum contributions go up fairly often. Stay informed about each year’s cap so you can invest the highest amount. Doing so will benefit you significantly during retirement.

Defined Benefit Plans

Defined benefits plans are also called pension plans and qualified benefit plans.

With this type of plan, you get a specific amount of money each month during retirement. You can count on it arriving just like you would a paycheck. You can think of it as deferred payments from your employer that you receive for the work you did during your career.

Some defined benefit plans are quite simple. In an arrangement you could get $100 per month for the rest of your life. Others could determine the amount of money on equations that consider factors such as how many years you worked for a company and how much money you earned during your last year before retirement.

With a defined benefit plan, you know how much money to expect each month. That’s different from defined contribution plans that can grow at different amounts depending on how the market performs.

Tap Into Your Home Equity

If you own your home, you can tap into its equity to help fund your retirement. You actually have a few options that can turn your home’s value into cash. Some options include:

  • Downsizing to a smaller, less expensive home.

  • Getting a home equity line of credit

  • Taking out a home equity loan

Downsizing to Generate Income

You probably don’t need as much space after you retire. In fact, a large home could seem like a problem. As you get older, you might not have the physical ability to take care of a big house and yard. Downsizing helps you avoid these challenges while putting money into your pocket.

Downsizing can earn money in a couple of ways. You could simply sell your home and move into a smaller place that costs less money. That would create a chunk of money that you could put into a bank account for future use.

If you don’t owe any money on your home, you might find that it makes more sense to keep your house even after you move to a smaller location. You could turn the home into rental property that generates passive income every month.

This approach often makes sense to people who plan to travel a lot during retirement. It could also make sense if you plan to move into a retirement community because you could use the rental income to pay for your new housing’s monthly expenses.

Renting property doesn’t mean that you need to get involved with tenants. You can hire a property management company to screen tenants, collect payment, and perform other essential tasks. Hiring a property manager will lower the amount of money that you earn from your rental home, but it also means you can enjoy your retirement without putting time and effort into your old house.

Home Equity Line of Credit

Your home contains significant value that you can use to your benefit. With a home equity line of credit, you get an account of revolving credit with a low interest rate.

The credit provider uses your home equity to lower the risk that you will repay your debt. In many cases, you can get interest rates as low as 4%. You might also find that you can deduct the interest payments from your taxes.

Home Equity Loan

A home equity loan gives you a lump sum of money. Also known as a “second mortgage,” home equity loans let you tap into the amount of equity you have in your home. You don’t need to own your property outright.

Even if you still make monthly mortgage payments, you can borrow money based on the difference between the going market price and the equity in your home. It’s another way to get an attractive interest rate when you borrow money.

Reverse Mortgages

Reverse mortgages are loans reserved for people 62 and older.
They work differently than typical loans and mortgages, though, in that you do not make monthly payments toward the balance.
Instead, you get the money upfront and the lender gets repaid when you sell the property, move out permanently, or die.
As long as you don’t want to leave property to your survivors, reverse mortgages can help fund your retirement without costing you anything upfront.

Generating Income in Multiple Ways

A little planning goes a long way. Many people rely on multiple sources of income during retirement. It makes sense to use stock dividends as part of your plan because you get more than regular payments.
You can also sell shares over time to get larger amounts of money as you get older.

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