There are more approaches to creating retirement income than you might think.
There are ways to manage or provide retirement income in addition to drawing on your investments or continuing to work. If you find coordinating a variety of income sources is more complicated than you anticipated, you may want to consider a charitable gift annuity.
Or, if you find you’re regularly short of cash, you may want — or need — to consider additional income sources, including capitalizing on your equity in your home or borrowing against your life insurance policy.
Income with a purpose
If you have assets you’d like to convert to a regular stream of income, you can create a charitable gift annuity by making an outright gift to a tax-exempt charitable organization that you would like to benefit — perhaps your alma mater or other educational institution, a museum, or an environmental group.
Similar to immediate annuities, charitable gift annuities can be a convenient way to create and manage retirement income. You can start receiving a regular stream of income immediately, and it’s designed to last for your lifetime, or for your lifetime and the life of a joint annuitant. In contrast with immediate annuities, however, the money you use to buy a charitable annuity is a tax-deductible gift to the sponsoring institution. You can take the deduction the year you set up the annuity.
You’ll discover that almost all institutions that offer charitable annuities follow a uniform set of rules and offer the same rates of return. So one thing you don’t have to worry about is shopping for the best deal.
Those suggested maximum gift annuity rates are set by the American Council on Gift Annuities. In general, the older you are when you make your gift, the higher the rate at which your income is paid.
You can fund a charitable annuity with cash, or you can transfer stocks, bonds, funds, or real estate to the sponsoring organization. After you make your initial gift, the income you receive depends on several factors including your age, the value of your gift, and whether the income will cover one or two lives. Only part of your charitable income annuity is taxed, at the same rate you pay on ordinary income. The rest is tax-free return of principal.
Keep in mind that charitable annuities generally have minimum funding requirements. That means you’ll probably need assets worth at least $50,000 to get started. And it’s no surprise that larger gifts have greater potential to generate more retirement income.
Real estate income
If you own your home, you may be able to convert it to a source of retirement income in one of three ways:
- Sharing the space
- Taking a loan called a reverse mortgage from a bank or other lender
If selling your primary residence is something you’d consider, you might want to downsize to a smaller property, either near where you live now or in another, perhaps less expensive, location. When you scale back, you can reinvest gains from the sale in an income-generating account or annuity. It’s important to remember, however, that the ease and profitability of this approach largely depends on the housing market when you’re ready to sell.
If you aren’t interested in selling your home, you might consider sharing it to reduce your expenses. There are a number of approaches. You might invite a close friend or family member to share the space and the costs. You might find renters for part of the house. While there are potential benefits to either of these arrangements, there are also potential drawbacks that you’ll want to consider seriously before you decide.
For example, dividing your home into two apartments may violate local zoning laws.
If you own your home and you’re 62 or older, you’re probably eligible for a reverse mortgage, which allows you to borrow against your home equity. With a reverse mortgage, your lender establishes the amount you can borrow and provides a lump sum, a series of regular payments, or a line of credit.
While reverse mortgages can supplement retirement income, there are drawbacks to these loans. Over time, you gradually accumulate increasing debt. That amount, plus interest and fees, has to be repaid when you die or move out of your home. That usually means selling the property. You have other costs and responsibilities, such as regular upkeep of the property, too. They are among the reasons the law requires credit counseling before you can finalize a reverse mortgage.
Tapping life insurance
If your children are financially independent and your mortgage is paid off, you might want to consider borrowing against your life insurance policy as a way to supplement your retirement income.
Over time, whole, or permanent, life insurance policies accumulate a cash value, against which you can borrow. When you borrow, however, the death benefit of your insurance policy is proportionately reduced. To fully restore that benefit, you must repay the loan plus the interest that accrues. If you die while your loan is outstanding, the death benefit available to your beneficiaries will be reduced by the amount you owe.
Most term life insurance policies have no cash value and can’t be a source of retirement income. The exception is a return of premium (ROP) policy. In that case, if you are alive when the policy ends you get back all the premiums you paid.
Income Sources To Consider For Safer Retirement by Inna Rosputnia
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