It's scary to think about running out of money.
Where would you live? How would you pay your bills? You couldn't travel. You might have to move in with your kids. Or worse, become homeless.
Ask yourself: How long will my money last?
Not sure? Here are some ideas to help you figure that out. And to (hopefully) make you feel better about your retirement planning.
Let's dig in.
The Retirement Formula
Imagine if you had enough money coming in from passive income sources that you could pay all your bills, travel and still have cash left over for emergencies. That would be amazing.
That would be retirement. Or financial freedom. Whatever you want to call it.
When passive income > living expenses + fun money + emergency money = you can retire
As soon as you have enough income from sources that you control, you control your life. You no longer have to work for someone else and be at their beck and call.
That is a beautiful thing.
But does that mean you'll never run out of money? How can you be sure your money will last?
First you need to add up all the guaranteed and passive income sources you have. Then understand the risks and opportunities that can make your income last forever or go away.
You should feel good knowing you have one guaranteed income source.
That is Social Security.
As long as you (or your spouse or ex) have enough credits to qualify, you can claim Social Security. You will receive monthly income payments that are guaranteed by the Federal Government of the United States. And your Social Security income will last as long as you live.
There is no income source as secure as Social Security. It's right there in the name.
How to qualify for Social Security:
- Have 40 credits from working to be fully insured
- Be the spouse of someone fully insured
- Have reached age 62 or older
More details can be found at the Social Security Administration website. You can create an account and see what your future monthly benefit will be.
Just know that once you are fully insured for Social Security benefits, that benefit cannot be taken away from you.
Two Ways to Increase Your Social Security Income
To get the maximum income allowed to you through Social Security, there are two other important details to understand.
First is that your retirement benefit is based on your highest 35 years of employment income. If your average income across those years is low, your benefit will be lower. If don't have 35 years of employment income, you get zeros for those years.
If you can make more money, your Social Security benefit will increase. Replace your early, lower income years with later, high paying years. For 2019, the income to max your Social Security is $132,900. Making more than that will not increase your benefit.
The second thing to know is that you can delay your Social Security to increase the monthly payments permanently. For every year you delay from full retirement age (up to age 70), you increase your monthly income by 8%.
So to increase your Social Security income permanently:
- Make as much money as you can. At least $132,900 (2019) or above.
- Delay taking Social Security until age 70.
Do those two things to have a higher guaranteed Social Security income for life.
Unfortunately, you don't have any direct control over Social Security once you start taking the income. For more control and higher income, look for other passive income sources.
Other Passive Income Sources
Don't rely completely on Social Security for your retirement income.
It's a good idea to have diversified passive income sources. Especially incomes that you own and control.
Here are 3 passive income ideas to consider:
1) Income producing real estate
You know how renting a house or apartment works. Maybe you're renting right now.
One person owns a property. They are the landlord or owner. They offer the use of the property to another person, the tenant. The tenant pays a monthly amount for access to and use of the property. That's renting.
Owning rental properties is a great source of passive income.
Commercial (business) property can work really well for this. But most people start with residential real estate.
You can also do this with your primary house. Using a platform like AirBnb.com, you can rent out a spare room, your basement, an apartment over the garage, or the whole house.
All without going through the process of buying a new property.
The amount you can make from AirBnb can be higher than normal rent. Because short term, nightly rentals are more like a hotel than a typical rental.
I have two friends who make around $1,000 extra each month by AirBnb-ing rooms in their houses. Rooms that would otherwise sit empty and unused.
Would you like an extra $12,000 a year of mostly passive income?
I thought so.
2) A (passive) cash-flow business
Another great passive income source is a cash-flowing business.
I especially like businesses that are internet-based so you can be mobile and work from anywhere. You can automate parts of your business so they run on auto-pilot. That would allow you to spend time living abroad while still having an income.
My favorite amongst these is online education. Online courses are a huge and growing opportunity.
Listen to this podcast episode with Tommy Griffith of ClickMinded to learn how he build a mulitple 6-figure online course business while working.
You can also purchase an existing profitable business. In this post I show three examples of cash flow businesses you can buy that yield a 20%+ income to the owner.
Or you can build your own business and income from scratch.
Whichever you choose, know that owning a cash-flow business can add a diversified income to your retirement.
3) An investment portfolio of stocks and bonds
Besides Social Security, getting income from a portfolio of stocks and bonds is the most popular passive income source.
Often the investments are held in tax-deferred accounts. That means you don't pay taxes on any interest, dividends or capital gains while the money remains in the account.
Depending on the type of account, you may have to pay income tax when you withdraw money. You also can owe penalties, depending on your age and situation. With a Roth IRA, you don't pay any income tax when you withdraw income, but may still owe penalties.
Examples of tax-deferred accounts:
- 401k / 403b
- Individual Retirement Account (IRA)
- Roth IRA
- Tax deferred annuity
Having taxable investing accounts can give you flexibility with your investment money. If you want to retire early or start a business in a week, you may want to have money invested that you can access without penalties, like a taxable investing account.
Examples of taxable investing accounts:
- Individual investing account
- Joint investing account (two or more people)
It's easy to get started investing.
There are a number of low-cost options where you can start investing with small amounts of money. My favorite is Betterment.com.
Four Keys to a Successful Investment Portfolio
- Keep the expenses low
- Diversify across stocks and bonds, domestic and international
- Don't be too conservative
- Understand where to pull money from to avoid penalties
You should also add money each month if you can. Compounding of returns is amazing but can take some time. Automate your savings so you don't have to think about it.
There are some drawbacks to having an investment portfolio for income.
One is that it can take a long, long time. Like 20-40 years. Another drawback is that you really don't have control over the stocks and bonds you own.
Just because you own Microsoft stock doesn't mean you have any say how they run their business.
Calculating "How Long Will My Money Last?"
Now let's figure out how long your money will last.
We know Social Security will continue as long as you live. And delaying when you start can increase that monthly amount.
So when it come to Social Security income, the answer is "as long as you do"!
But what about all the other money that you own and control? Money you saved or inherited.
Clearly you must keep growing that money through your life. Because of inflation, the money will lose value over time. And it can be significant.
At 2.5% inflation, something that costs $1,000 today will cost $2,115 in 30 years. Yikes.
Inflation is the silent destroyer of long retirements.
If you keep your money in the bank earning less than inflation, your money (and Income) will run out too soon. Or you'll need so much to start with that it will take a long time to save.
Neither way is good.
Instead it's best to spread your money across various income sources:
- You could buy a rental apartment
- Put your basement bedroom on AirBnb.com
- Own a cash-flow business (ideally 3 or more)
- Have a diversified investment account at Betterment.com
Having this combination will give you a higher income that just having money in stocks and bonds. Plus you would be way more diversified in your income sources. That can help the money last longer.
Here are two examples to show you what I mean.
How Long Will My Money Last - Example #1
Let's assume the following:
- Your monthly expenses are $7,000, including "fun money"
- You get SS income of $2,000 per month
- You have an investment portfolio of $800,000
- The portfolio is conservative with an average annual return of 3.5%
How long do you think your money will last in this scenario?
Using our financial calculator, we can plug in these numbers to get the answer:
Your money will last 18 years
So if you were 65 when this began, you would run out at age 83. And we didn't even factor in inflation. That will a big negative impact on your results.
How Long Will My Money Last - Example #2
We will change our assumptions for this example:
- Your monthly expenses are $7,000, including "fun money"
- You get SS income of $2,000 per month
- You own a passive online business that nets you $3,000 per month
- You AirBnb your mother-in-law suite and make $1,000 per month
- You have an investment portfolio of $500,000
- The portfolio is more aggressive with an average annual return of 7.5%
Now how long do you think your money will last?
My financial calculator gave me an error message. Why?
Because your money will last forever
In this scenario, you only need to withdraw $1,000 per month from your investment portfolio. And since your average return is now 7.5%, you will keep growing the investments indefinitely.
What about inflation?
Your portfolio of stocks and bonds will certainly outpace inflation, as we just mentioned.
With your passive online business you could keep growing it, raise prices or take $1,000 of that monthly income and add it to your investments. And after many years you can sell the online business.
The AirBnb rate can be increased over time also. Just like rents rise over time.
Hopefully you can see that the second example wins every time. Not only is it better to have a more aggressive investment portfolio, but your income sources are way more diversified.
When the next market meltdown happens, do you want all your money invested there?
Of course you don't.
Now It's Your Turn
How long will my money last?
There are several things to consider when answering this question:
- How much money do you have invested?
- Is your portfolio conservative or more aggressive?
- How much will you get from Social Security?
- Can you increase that SS income by delaying it?
- Have you considered buying a rental or AirBnb-ing a room in your house?
- Could you buy a business that already has monthly cash-flow?
- Can you start a business so you have another income source?
Be aware of inflation. It is the silent destroyer of retirement.
Don't make the mistake of keeping all your money in a conservative portfolio of stocks and bonds. That is a risk to your retirement success.
What are your plans for your retirement money? Have you considered buying or starting a business for income? What is your experience with Airbnb?
Leave your answers in the comments below. Thanks!