Income diversification is the key to success when it comes to personal finance management. What it means is that the more sources of income you have in retirement, the more secure you may feel. So, what are the options?
Social Security
It is one of the main revenue streams for many of today’s retirees. As estimated in 2015, the Social Security Administration sends monthly payments to approximately 39 million retired workers. As for the average amount of a monthly payment, it is $1,348 a month, according to SSA statistics. Nevertheless, you should not rely too much on social security payments. After all, it was predicted that Social Security would only be paying about 75% of scheduled benefits after 2034.
Retirement Accounts
There are at least seven types of retirement accounts you may consider, although the most popular ones are 401(k)s, traditional IRAs and Roth IRAs. The first one is sponsored by employers, while the difference between the second and the third accounts lies in tax policy. For many Americans, 401(k)s are the easiest way to start building up retirement savings. In case you leave your job, you have an opportunity to roll your account over into a new employer’s 401(k) or your own IRA.
As for IRAs, there are traditional IRAs and Roth IRAs. Both types provide significant tax benefits, while the difference is in timing when you may receive them. Traditional IRAs allow you to take a tax break before your retirement, while the withdrawals after you retire are taxed at ordinary income tax rates. Roth IRAs, in turn, do not provide any tax breaks for contributions, although retirement withdrawals after age 591/2 are tax-free.
No Mortgage Debts
Owning a paid-off house means that you have got rid of one of your biggest monthly expenses. It is better to pay it off as soon as possible. In order to do this, try to develop a couple of habits – add an extra amount you can comfortably afford every month (even as small as $25), double up your monthly payments four times a year, add tax refunds and some part of all your windfalls to your payments, and so on. Prior to this, however, don’t forget to make sure there are no prepayment penalties.
Nevertheless, it is necessary to take the following details into consideration. It may happen that extra payments are not the best solution in your particular case.
Investments
Even though keeping money in saving accounts is safer, this does not have the potential to bring you any substantial income like some risky alternatives. In view of this, it is better to invest some of your funds in either stocks and mutual funds or ETFs. To find out more, read this article at Investopedia, but if you still think that it is too complicated for you, there is a simpler option – high-frequency trading. Glenmore Investments website is a good place to find out more and start. In any case, try to avoid too large risks. High returns should not be your priority – try to focus on small but regular profits.
Health Insurance
Health care costs continue to grow, but you still need to try to figure out how much money you will need for health care when you retire. Adequate health insurance through Medicare is an important part of your retirement plan. An even better option is also to buy insurance through some private company. Health savings accounts (HSA) are a good alternative, however. Being quite tax-friendly, they are similar to 401(k)s as the contributions are taken out of your paychecks on a pretax basis. Whatever option you choose, make sure to purchase long-term care insurance in case you have any chronic illness.
