Opinion: Access These 7 Streams of Income during Your Retirement!

Daniella Cressman

Disclaimer: This information is accurate and true to the best of my knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

As you are preparing for retirement, it’s important to ensure that you have multiple income streams arriving in your bank account every month so that you can maintain your peace of mind during your golden years. After all, you don’t want to be stressed out about your finances when you are supposed to be resting after a lifetime’s worth of work!

1. Retirement Distributions

Once you reach a certain age, you have the option to withdraw a specific amount of money from your retirement accounts. However, you will want to research each option because they all come with different advantages and disadvantages.

"RMD stands for required minimum distribution, and once you hit age 72, you’ll have to start taking this minimum amount of money from many retirement accounts, such as a traditional IRA or 401(k) plans. You must take RMDs annually by April 1 of the year after you turn 72 and by Dec. 31 in subsequent years. In other words, if you turn 72 in 2021, you have until April 1, 2022, to take your first RMD." — James Royal

You can choose to leave your funds in your retirement account before you reach 72 years of age if you want your investments to grow so, if you don’t absolutely need the income, this may be the best course of action.

"If you need retirement savings to get by and you’re wondering whether to take them from an IRA, 401(k) or a Roth account, don’t be tempted by instant gratification. Sure, a Roth IRA withdrawal will be tax-free, but you may wind up paying more in lost opportunity. Instead, withdraw from taxable retirement accounts first and leave Roth IRAs alone for as long as possible." — James Royal

It’s important to be strategic when it comes to withdrawing your funds from various retirement accounts. In short, it’s probably in your best interest to withdraw your money from taxable retirement accounts first.

You do have plenty of options when it comes to your retirement distributions. For instance, you can choose to withdraw stocks and bonds versus actual cash.

"Don’t want to sell your assets? It’s easier to take withdrawals in cash, but that doesn’t mean you have to — or should. So-called in-kind distributions are taken out in the form of stocks or bonds, and they may make more sense for people who want to keep assets for various reasons. You’ll simply move the assets from your IRA into a taxable account. These in-kind withdrawals will be assigned a fair market value on the date they are moved. An in-kind withdrawal may be easier and less expensive than triggering fees by selling the securities in the IRA and buying them back in a brokerage account.— James Royal

If you have plenty of cash on your person to support yourself already, this could be an excellent move, because you could simply invest these financial assets and increase your net worth over time.

If you are still employed at the age of 72, it’s probably a good idea to take advantage of the RMD reprieve you’re entitled to.

"Putting off your retirement? If you’re still working at age 72 and continuing contributions into a 401(k) or 403(b), you’re entitled to an RMD reprieve — as long as you don’t own more than 5 percent of a company and your retirement plan lets you. If these conditions apply, you can delay the RMDs until April 1 after the year that you 'separate from service,' at which point you’ll have to start taking withdrawals. This is true as long as you work during any part of a year. So if you’re 72 ½ years old and thinking about retiring by the end of the calendar year, reconsider if you don’t want to make a withdrawal. If you keep working after Jan. 1 — even if it’s just a day — you’ll push off the date for taking that first RMD by one more year. Keep in mind that the delay only counts for the 401(k) plan of the company you’re still working for. If you have other 401(k) plans from previous jobs, you’ll need to take distributions from them if you’re 72 or older."— James Royal

You might want to be strategic as to when you decide to retire: it’s best to do so by January 1.

"Tax professionals and retirement advisors often push clients to roll retirement accounts into Roth IRAs, where time and tax-free growth can work their magic. But it’s not a silver bullet, and the move may not make sense for some workers. The conversion of a traditional 401(k) or traditional IRA to a Roth IRA will generally trigger a tax bill. However, once you make the move, all the funds grow tax-free and can remain untouched. For example, let’s say a 43-year-old gets a new job and decides to move $150,000 from their 401(k) into a Roth IRA. If this person is in the 35 percent federal tax bracket, they’ll owe $52,500, which would be wise to pay with funds outside of the IRA. If the entire amount in the Roth remains untouched and it grows at an annual rate of 7 percent, it would be worth $1.14 million in 30 years. What about someone who’s close to retirement or taking RMDs? If you need the retirement funds for yourself and don’t plan to pass them on to heirs, then it may be smart to leave them where they are. But if you want to preserve that retirement asset for heirs...it’s a great move because it removes the uncertainty of what future taxes will be. Converting to a Roth is a great thing to do for the next generation."— James Royal

In short, the most suitable retirement plan varies by each individual’s needs, so, if you are uncertain about what the best course of action is for you, then you might want to speak with an accountant.

"If your career is winding down and you find yourself earning less income, it may be necessary to take distributions from your retirement plan. If you’re at least 59 ½ years old, you’ll be able to take distributions from retirement plans without getting hit with a 10 percent early withdrawal penalty. It may also be an opportune time to convert a portion of your traditional IRA to a Roth IRA — especially if your marginal rate is lower than you expect it to be after you turn age 72, when you will be required to take minimum distributions. This strategy can also help you put off taking Social Security until a later age, when benefits will be bigger." — James Royal

While withdrawing retirement distributions is understandable if you need the income, it’s probably the best idea to keep your money in those accounts for as long as possible so that you can take advantage of compound interest.

There are many retirement accounts to choose from, and you are allowed to contribute to multiple ones, which is an important element to remember. You have many options, including the following:

  • The Roth IRA
  • The Solo 401k
  • The SEP IRA (for self-employed individuals)
  • The Traditional IRA

As usual, the best course of action will depend on your goals, financial situation, and preferred quality of life.

2. A Health Savings Account

While you can often receive benefits from the government, these can sometimes be limited, especially if you prefer specific types of care. Contributing to an HSA is a wonderful way to provide yourself with more options should you require medical care during retirement.

"Ideally, this is a strategy you will implement prior to retirement. Funding an HSA account is a great way to combat the rising cost of health care in retirement and to do so with tax-free withdrawals. The HSA allows you to contribute money on a pre-tax basis. Leave this money invested while you are working and pay current out-of-pocket medical expenses from other sources. You can then use this money to cover qualified healthcare expenses in retirement with tax-free withdrawals." — Steve Chen

It’s always important to be as prepared as possible.

While Medicare is wonderful, it does have its limitations.

"Medicare’s initial enrollment period starts three months before the month you turn 65. It includes the month you hit full retirement and ends three months after. This totals to a potential seven-month enrollment time frame. Generally, you are advised to enroll during this period to avoid future financial penalties for Medicare Part B. On the other hand, there usually isn’t a penalty for signing up for Medicare Part A in a different enrollment period because it’s usually free. You need to work for an employer that has 20 or more employees to drop this plan without being penalized. If you’re self-employed and don’t have a subsidized health care plan under an employer then you should keep your plan to avoid future fines. An exception to this rule is if you want to continue contributing to a Health Savings Account fund — once you become a new Medicare beneficiary, you’re not allowed to put money into this fund anymore." — Steve Chen

Unfortunately, you will have to choose between accessing Medicare’s benefits and contributing to your Health Savings Account at some point.

"If you’re self-employed and receiving Medicare services, you can deduct all Medicare premiums for you and your spouse from your tax statement. Deduct these costs on Schedule 1 of the 1040 form to lower your Adjusted Gross Income. Medicare premium deductions only affect your income tax, meaning you will still need to pay your standard Medicare and Social Security self-employment taxes." — Steve Chen

Each approach certainly has its pros and cons. You may want to speak with your accountant to decide which course of action is best for you and your family.

3. Part-Time Work

While you cannot work full-time during retirement, you can work part-time, and self-employment is an option. If you have always wanted to write a novel or pursue a singing career, perhaps now is the time. On the other hand, you could work for an organization you believe in.

It’s important to note that self-employment has plenty of pros and cons when it comes to tax deductions and benefits, so you will want to consider all of your options before taking this route. That being said, many find themselves happier during their golden years if they pursue their passions in life because they often feel more fulfilled as a result: doing nothing with your time except going to the spa and sleeping is perfectly acceptable, but this can become boring for many people after an extended period of time.

"If you retire from your normal 9–5 job to become self-employed, you can still collect your Social Security and Medicare benefits. If you’re self-employed, the individual is still expected to pay income taxes on the salary you make. There are many self-employment options for recently retired individuals…"— Lee Williams

While it might be nice to have more control over your income — especially if you love your job! — there are definitely some drawbacks when it comes to the additional taxes you will have to pay.

"Any self-employed individual that makes a net earning of more than $400 must report income and file taxes with the IRS. It’s important to make sure you have an individual taxpayer identification number (ITIN) or Social Security number handy during the tax filing process. The self-employment Federal Insurance Contributions Act (FICA) taxes are split between Social Security and Medicare at a rate of 15.3 percent of your wages. To break it down further, 12.4 percent of your total income will contribute to Social Security and 2.9 percent will contribute to Medicare." — Lee Williams

If you want to become self-employed, you will definitely have to decide whether it’s worth the extra time and money. For many, it is. For some, it is not.

"Determine your net income and apply the 15.3 percent tax rate to earnings that are subject to taxes. If you’re filing taxes over the age of 65, you can use a Form 1040-SR instead of using the standard Form 1040. You can use Schedule C on this form to calculate your income tax. Something to keep in mind is if you work in a trade or are 'self-employed in a business involving manufacturing, merchandising or mining, gross income from that business is the total sales minus the cost of goods sold' according to the IRS.'"— Lee Williams

If you want to make a modest amount of income doing something you love, this could be an incredible way to increase your net worth and do something meaningful with the extra time you have on your hands.

“You can continue to collect Social Security benefits while earning a self-employment income. Even if you’re self-employed, you’ll still need to continue paying 12.4 percent of your net salary in taxes for Social Security.” — Lee Williams

Thankfully, Social Security is still yours for the taking when you work for yourself unless you earn quite a bit of money.

"Working won’t affect your Social Security benefits even if you’re making a high income beginning the month you reach the full retirement age of 66. However, there is a limit to how much you can make and still receive Social Security benefits if you’re younger than the full retirement age. According to the Social Security Administration, the normal retirement age (NRA) for anyone born after 1959 is 67 years old. The NRA is the age at which people can receive full Social Security benefits after leaving the workforce. However, you may receive these benefits at the age of 66. If you earn above the limit of $50,520 a year at your retirement age then Social Security will take one dollar for every three dollars earned. Lastly, if you’re under your full retirement age then the income limit is $18,960. If you exceed this then Social Security will subtract one dollar from every two dollars of the extra income." — Lee Williams

As you can see, working while self-employed can certainly be limiting when it comes to receiving certain benefits during retirement, especially if you are raking in a lot of cash.

“Self-employed individuals will need to continue paying 2.9 percent of their net income to Medicare taxes.” — Lee Williams

These costs can certainly add up.

4. Social Security

The vast majority of individuals who have worked for most of their lives will have access to Social Security. The amount you will receive, however, will vary and is dependent on many factors.

"Your retirement benefit is based on your lifetime earnings in work in which you paid Social Security taxes. Higher income translates to a bigger benefit (up to a point — more on that below). The amount you are entitled to is modified by other factors, most crucially the age at which you claim benefits. For reference, the estimated average Social Security retirement benefit in 2022 is $1,657 a month. The maximum benefit — the most an individual retiree can get — is $3,345 a month for someone who files for Social Security in 2022 at full retirement age (FRA), the age at which you qualify for 100 percent of the benefit calculated from your earnings history. FRA is 66 and 4 months for people born in 1956 and is gradually rising to 67 for those born in 1960 or later." — AARP

As you can see, it’s best to ensure that you have multiple income streams so that you are not solely dependent on Social Security.

“Between 62 and FRA, Social Security reduces your benefit for filing early; between FRA and 70, it increases your payment as a reward for waiting.” — AARP

It’s usually in your best interest to withdraw your money later instead of doing so immediately, unless you absolutely need to.

“Your actual benefit will vary, perhaps significantly, based on fluctuations in your earnings, cost-of-living adjustments, whether you continue to work after claiming benefits and changes in the Social Security law." — AARP

You could get by on this amount — at the higher end — if you do not prefer an expensive way of life, but that could be compromising, especially as you are growing older and are, therefore, probably more accustomed to certain creature comforts, which is completely understandable.

"Social Security sets a cap on how much of your income it takes into account in figuring your benefit. In 2022 the cap is $147,000 (it’s adjusted annually to reflect historical wage trends). Any income above that is not counted in your benefit calculation (and is also not subject to Social Security taxes)." — AARP

For this reason, it’s important to remember that Social Security is only one stream of income.

If you have a public-sector pension, this will significantly affect your social security. In fact, you may not be eligible for Social Security at all.

"There’s a chance you may not be eligible for Social Security at all. An estimated 30% or so of public-sector workers across 12 states are not part of the Social Security system. (To find out if that’s you, ask your employer’s benefits administrator.) That situation makes it all the more important to get serious about saving for retirement on your own, rather than relying on your pension to cover all your income needs down the line." — AARP

Unfortunately, not everyone will receive Social Security, which makes it all the more important not to become reliant on this particular income stream during your golden years.

5. A Pension

Pensions are wonderful for folks who have been dedicated employees for many years.

"A pension is a retirement account that an employer maintains to give you a fixed payout when you retire. It’s a kind of defined benefit plan. Your payout typically depends on how long you worked for your employer and on your salary. When you retire, you can choose between a lump-sum payout or a monthly 'annuity' payment." — CNN Money

If you opt for a lump-sum payout, you can then invest your dollars to your liking and watch them grow. Of course, great freedom comes with great responsibility, so it may be tempting for some to overspend. On the other hand, a monthly payment is quite manageable, but it will likely provide you with fewer options when it comes to investing your money.

"Steady payments: Most people choose a monthly payout, also known as a 'life annuity.' Having that steady income can make for less stress than taking a big lump sum, especially if you aren’t an experienced investor. Lump sum: If you take a lump sum, you must assume responsibility for how the money is invested and how much you can afford to spend each month. One danger with a lump sum is that you may be tempted to spend too much today, leaving you short of money down the line. By choosing a steady monthly payout, you’ll avoid the temptation to run through your pension stash. But there are other factors to consider, too. For more see What are the advantages of taking a lump sum?" — CNN Money

At the end of the day, steady payments are ideal for novice investors who are scared of overspending while lump sums are best for experienced investors who plan to increase their net worth.

If you are wondering whether you will pay taxes on your pension plan, the answer is a resounding yes.

“Yup. Uncle Sam hits you with a tax on every penny, and some states get into the act, too.” — CNN Money

It’s important to remember this as you are budgeting for various expenses: All of those taxes add up!

“Your pension should be just one tool in your retirement shed. Chances are, most pensions will not produce enough income to fully cover all your retirement needs, so you should be saving in other accounts as well.” — CNN Money

In short, diversification will likely serve you well in the long run.

"And if you are eligible for a Roth IRA, that is often an unbeatable way to save for retirement. In 2016, individuals with modified adjusted gross income (MAGI) below $117,000 and couples filing a joint tax return with MAGI under $184,000 can make a full $5,500 contribution to a Roth IRA; if you’re over 50, you can add another $1,000 to boost your annual contribution limit to $6,500." — CNN Money

You may want to hire an accountant so that they can help optimize your investments.

6. Charitable Donations

If you have a sizeable amount in your retirement and you want to support a cause you believe in, you might want to consider donating to your favorite charities.

"This law lets individuals aged 70 1/2 or older make tax-free donations, known as qualified charitable distributions, of up to $100,000 annually directly from their IRAs to a charity as part of their required minimum distribution. Such a distribution doesn’t count as income, reducing any income tax liability to the donor. And if you file a joint return, your spouse can also make a contribution up to $100,000 each year. But be aware that individuals who make tax-free charitable distributions from their IRAs won’t be able to itemize them as a charitable deduction." — CNN Money

The downside of this is that, although your donations from your retirement account will be tax-free, they will not be tax-deductible.

7. Financial Assets

It would be very wise to invest in prime real estate and rent it out so that you can count on consistent income every single month.

You may also want to invest a generous sum of money in the stock market so that you can live off of the returns.

Additionally, if you haven’t already, it is probably pertinent to build up an emergency fund of at least $24,000 — depending on your preferred quality of life — so that you can rely on this for a year if income from your financial assets fluctuates, as it often does.

How to Reduce Your Taxes during Retirement

If you want to reduce your taxes, it’s a good idea to familiarize yourself with the following:

  • The benefits of tax diversification
  • Asset allocation
  • The advantages and disadvantages of each retirement account
  • Required Minimum Distributions (RMDs)
  • Roth Conversions

On one hand, retirement is a welcome respite from the rat race. On the other, it can leave many feeling deeply depressed because they don’t feel as useful as they once did. If you have socked away plenty of money to support yourself, you will have the freedom to eat at lovely restaurants while relaxing and traveling the world, enjoy some well-deserved downtime, or pursue passion projects that you may have held in your heart for a long time.

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Canadian-American author writing about local politics, personal finance, & dining in Albuquerque.

Albuquerque, NM
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