Non-Guaranteed Retirement Income Strategies

There are other retirement tools besides income annuities that can help protect against the risk of outliving your savings. To incorporate this strategy into your retirement saving plan, consider these non-guaranteed retirement income approaches to supplement the income you've built for retirement. 

The Three-Legged Stool

The old retirement adage says that we should use the three-legged stool approach to prepare for retirement:

1. Social Security – This is the government’s retirement plan for us. As long as you’re working and paying taxes, you’re earning Social Security credits. When you retire, you’ll start receiving monthly Social Security income that will continue for as long as you’re alive.
2. Pensions – This is the form employer retirement plans used to take. They provided a steady monthly paycheck no matter what happened in the market and no matter how long you lived. Because Social Security only covers, on average, 40% of one’s retirement expenses, people leaned on pensions for the rest.
3. Personal Savings – So that you have access to money outside of, and beyond, monthly Social Security and pension checks, you need to save on your own. This money is generally invested differently to serve two purposes. First, money invested in liquid money market or savings accounts provides a cushion and access to extra cash in case of emergency. Second, money beyond that can be invested in the market for a high potential return. This is the money you’re comfortable losing.

Below we focus on four additional ways you can accumulate your personal savings beyond the market or in savings accounts. While these approaches are non-guaranteed retirement strategies, they can supplement your guaranteed retirement strategies, such as your income annuities.

1. Invest in real estate

The real estate you own can provide you with a great source of supplementary income. By the time you reach retirement, you may own a second home. If you can rent it out to a tenant, you can establish a new source of monthly income. If you don’t own a second home by then, do a careful cost-benefit analysis before deciding to purchase another home. There are complicated tax planning implications, and you have to make sure that the rental income and expenses on the house will be worth the purchase price. There’s often a lot of maintenance work and upkeep to be done on rental properties, and can be a fairly time consuming activity, which you may not want in retirement.

2. Downsize your home

You may not need all the space you once did when you had a full family and the extra money it generates could be significant to your savings.

3. Invest in a managed payout fund

In general, managed payout funds aim for steady monthly payouts in retirement that accounts for inflation. However, there are a lot of risks that come with being in the market: they put your savings at risk, don’t provide a guaranteed income, and in a worst case scenario the fund could run out.

4. Take a reverse mortgage

These mortgages allow homeowners over 62 to use their home equity as a tax-free source of funds. They can become an additional source of retirement income. You can usually borrow more if you’re older, your home is very valuable and the interest rate is low.

They do come with pitfalls though, starting with the 0.5% of loan fee that borrowers can expect to pay at closing. They also must be paid off once the last surviving borrower passes away or no longer lives in the home, if the loan is insured by the Federal Housing Administration's Home Equity Conversion Mortgage program.