Sources of Retirement Income
As people approach their retirement, the need to maintain a reasonable level of income during their retirement turns into a real concern. It occurs that one needs a reasonable and steady stream of income if they are to maintain the standard of life they had been accustomed to during their working years. In fact, keeping in mind that healthcare costs tend to increase with age, there is every possibility that one might actually need a higher income during their retirement than they did during their working years.
The main sources of retirement income are from investments, savings, pensions and social security, which we will examine briefly.
The term ‘investments’ refers to the income generating assets that one acquires mostly during and possibly after their active working life. Common investments include pieces of real estate, stocks and other financial products like annuities. One needs to create a strong portfolio of investments if they are to secure a comfortable retirement. Of all sources of income typically available to retirees, only investments offer real room for growth to cater for unforeseen expenses and inflation during one’s retirement.
Savings essentially refer to money that one puts aside for future use or for buying investments. It is essential for anyone prudently preparing for their retirement to build up sufficient savings. Of all the major sources of retirement income, savings offer the greatest security and flexibility to the retiree. The security from savings comes from the fact that unlike investments, savings (when put in a bank) are virtually risk free as they are covered by federal deposits insurance. And the flexibility from savings comes from the fact that unlike pensions and social security, the whole amount of savings is within the retirees’ control and they can choose to withdraw and dispose of it as they deem fit. This is unlike pensions and social security, which are usually doled out in (often severely) rationed amounts.
Pensions are payments given out usually by former employers to their retired employees. Automatic employer-provided pensions are increasingly becoming a thing of the past, as many employers are nowadays asking their employees to take responsibility for their retirement incomes by making contributions to defined contribution plans, which the employers then top up. Some employers (like the government and the military) do still offer the olden automatic pensions. In the case of a defined contribution plan, it is prudent to prepare for one’s retirement by making the highest contribution one can into it because as mentioned, money contributed to such plans is usually proportionally topped up by the employer, and is also subject to some tax benefits.
Retirement income from social security refers to money that is paid by governments to retirees (usually on account of their age) as part of the social welfare programs. Ideally, in prudently preparing for retirement, one should create many other streams of income to supplement social security, which is often inadequate to comfortably cover for one’s needs during retirement.
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