Your income in retirement will fall into two categories: Fixed and Variable.
Fixed income is a predictable income stream. Bonds typically are the first investments to come to mind when you start discussing fixed income options. Pensions, annuities and social security are the only income streams that can offer a guaranteed lifetime income. Some annuities offer an increasing income stream and pensions and social security may offer cost of living adjustments. A fixed income stream is one that you can count on and is stable and predictable.
Variable income is a stream of income that has the potential to increase or decrease. Income from brokerage and retirement accounts, which are made up of stocks, bonds and mutual funds, are variable streams of income. You must take fluctuation into account.
Example: You might start off taking a 4% income withdrawal from your account. However, if the stock market dropped by 50%, your 4% withdrawal just became an 8% withdrawal. An 8% withdrawal stream is a dangerously high withdrawal that could lead you to running out of money in the future if you don’t adjust the amount you are taking.
Dividend stocks tend to be stable for most areas of the stock market but there is a possibility for even those to change. Back in the early 2010’s, energy stocks were a favorite among dividend seekers due to the energy sectors higher than normal dividend yields. However, in 2014 to 2015, energy stocks collapsed as oil prices fell dramatically. Many of the well-paying dividend stocks in the energy sector were forced to drop their dividend payouts, with some eliminating the dividend completely. For many investors who were depending on their dividends, they were left with far less income than expected. The same thing happened to many of the financial stocks back in 2008.
Real Estate income can be variable depending on your location and the type of income producing real estate you own. For example, buying a home to fix it up and flip it for a profit can be great but also can lead to losses if the market turns against you. Buying a duplex to rent out, in a great location, with a long track record of rental history, can be a wonderful income stream. Real estate, much like the stock market, can go through periods of increasing and decreasing values so always keep that in mind.
Owner financing your business can be a great way for you to create an income stream for a specific number of years as well as spread your taxes over many years. If you sell your business to the right person or group, you’re able to enjoy an income stream set out by the terms of your sales agreement. If you sell your business to the wrong person or group, you might find your income stream starts fluctuating.
Getting a part-time job in retirement seems to be a trend among many who step out of their career but find they have too much time on their hands or not enough money to do the things they’d like. So, getting a part-time job can be a good option but the income it provides can be variable. Your hours can fluctuate and if the business experiences a slowdown you might be the first to be let go.
Retiring early takes preparation and planning. Retiring on one variable income stream is risky. You run the risk of that income stream decreasing or even possibly going away completely in the future. Having several variable income streams is less risky. If one of them fluctuates, you can still lean on the others. However, take it further and ask yourself the next question: what if one of those streams disappeared entirely, would it derail your entire retirement plan?
If you have one large fixed income stream, such as a pension, that more than covers your monthly expenses, that is great. Having one fixed income stream with one or two variables is excellent. Best case scenario: You have one or two fixed income streams along with two or three variable income streams.
Income is the key component in retirement planning regardless of whether you plan on retiring at 50 years old or 65 years old. The more streams of income you have in retirement will lead to a more secure retirement. This will allow you to retire with confidence and leave the money worries behind.
But remember my friends, if you don’t have all these things in place, it’s ok! That doesn’t mean you can’t retire earlier. For almost everyone I talk to, no matter their situation, we can always draft up a view of where they are and where they need to be, followed by some clear action steps to get them there. That’s the beauty of the DIAL™ into Early Retirement System. It’s a simple and clear approach for anyone to use to set up the right balance in their finances to have the option to get free earlier.
Live free my friends!