When it comes to getting ready for retirement, the focus is typically on setting aside enough money and investing wisely so you have enough to not only retire but also thrive. But what many people don’t realize is that you need more than just an impressive nest egg and a solid investment plan to thrive in retirement. It would help if you also thought about how to pay yourself in retirement.
Paying yourself means figuring out how you will fund your everyday expenses during your golden years and other necessary expenditures, such as housing, travel and education. If you’re unsure where to start, here are some ways to pay yourself in retirement.
1. Social Security
One of the best ways to pay yourself in retirement is to receive Social Security benefits. Upon retiring, you will be eligible for a monthly benefit based on your average indexed monthly earnings during your working years, which means you can earn more as you get older and receive more benefits.
The benefits you’ll receive depend on your retirement date and the number of years you worked, but the average monthly benefit is $1,166 per month at age 65 and $1,360 per month at age 70. While it’s recommended that you begin collecting Social Security at age 62 because it takes time for your benefits to build up and increase significantly, there are still plenty of other ways to pay yourself in retirement if you start earlier.
2. Pension Benefits
Another great way to pay yourself in retirement is through a company pension plan that provides a steady income throughout your retirement years. If you require less income throughout your retirement because you’re not working, you can still get a pension benefit that will help supplement your need for income.
Pension benefits are often based on the time you worked and the amount of money you made while employed by your company, so they may not be as much as Social Security benefits. Still, they provide a steady income stream that can help offset living expenses and allow you to retire debt-free.
3. 401(k) Retirement Plans
If you’re eligible to participate in a 401(k)-retirement plan, it’s a great way to pay yourself in retirement. While you won’t be able to withdraw money from your 401(k) until age 59 1/2, there are plenty of other ways to earn interest on your contributions. You can even use the money in your 401(k) to pay down debt or increase your savings if you have extra cash.
4. Annuities
Another good way to pay yourself in retirement is by investing in an annuity contract. An annuity contract is a policy that pays out a monthly income for the rest of your life, but it also allows you to receive payments for as many years as you want (up to 35 years). This means that if you start receiving payments early on, you can enjoy the benefits of an annuity for longer than 35 years. Annuities are contracts that provide a stream of income for life, usually in a fixed amount.
While annuities don’t provide the same compounding growth you’ll see with investments, annuity payments are guaranteed for life and can be very valuable in retirement. The average payout from an annuity is $1,300 per month at age 65 and $1,600 per month at age 70.
Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer. There are many types of annuities, so be sure to speak to your advisor regarding the differences and which type may be best for you.