Editors' pick: Originally published Jan. 7.
Saving for retirement is hard enough, especially if your nest egg is fed by a single income source. Developing multiple income streams can help deliver a life-after-work cash flow that lasts. In its annual analysis, the nonprofit Tax Foundation considered all of the sources of personal income as reported to the IRS in tax filings for the year 2013.
Perhaps there are at least a couple of income streams that you can add to your retirement savings strategy.
The core income
Of the total $9.2 trillion income reported on over 147 million individual tax returns in 2013, 70% of American income was derived from employment.
“For most tax filers in the U.S., the largest number on the 1040 comes on line 7, the very first line pertaining to income,” Alan Cole, economist for the Tax Foundation says in the report. “It is on this line that taxpayers mark wages, salaries, tips, and other compensation for their work. The amounts reported on the 1040 reflect most, but not all, labor compensation. Firms also pay for employee health benefits and make contributions to Social Security.”
So that’s our W-2 income – and it’s what we rely on most to float our everyday expenses as well as feed our future retirement revenue. Now to consider the other income sources we might tap.
Buying a future income stream
You can purchase a future income stream by diverting some of your income to a pension – in the off-chance that your employer offers you one – or by purchasing an annuity. Pensions and annuities accounted for $639 billion in income for taxpayers in 2013 and were the second-largest income source for Americans.
Annuities have been given a pretty bad rap in recent years, mostly because financial advisors make so much money off of them, leading to aggressive and sometimes unscrupulous sales tactics. But buying a low-cost annuity from a respected and highly-rated provider can provide an additional source of guaranteed retirement income.
Income from S corporations and partnerships can be based on business revenue or from investments. Energy investments – such as oil and gas, wind, solar and other alternative energy plays -- often use limited partnerships to gain investors. This is another area where potential buy-ins should be carefully considered and thoroughly vetted.
Of course, partnerships and S-corps can also be used for investments such as equipment and real estate rentals, land and timber, royalty-driven concerns, farms and ranches or timeshares – just to name a few.
Partnerships can provide a valuable income stream with little or no involvement on your part. Of course, finding the right business or investment is the key.
Ah, the precious profit known as a capital gain. How sweet it is: buy something and sell it for more than the purchase price. Simple, right? If only it was so easy. But capital gains accounted for $483 billion in taxpayer income in 2013.
A capital gain can be profit derived from the sale of a stock, house, property – anything. It’s not usually a recurring income stream, but a one-time sale. As stock investors know, it’s a matter of timing and discipline: Buy low and sell high is harder than it sounds.
Having a little business on the side has become a thing. Whether it’s freelancing a talent, skill or service, or working some kind of ecommerce angle, it’s easier than ever to start generating a side income.
It might be something you do after work or on weekends: consulting, repairing, creating or selling. Nearly all (95%) of U.S. businesses are “pass-through” entities, meaning they aren’t structured as corporations but as firms where the income passes through to the individual owner. The majority are simply sole-proprietorships – one-man bands.
So, it doesn’t take much to test an idea to see if it flies. While small business failure rates are high, if you’ve got a full-time job and start a little venture on the side, your risk is low.
Take Craig Newmark for example. He threw together a little website in his spare time when he moved to San Francisco for a new job. He started by listing local events -- and then job openings -- and his side hustle hobby really took off: it’s called Craigslist.
Who knows where Social Security is headed 10 or 15 years down the road? In the U.S., only 41% of 18- to 29-year-olds and 29% of 30- to 49-year-olds have confidence that the system will be around for them in the future, according to an AARP survey last year.
In the meantime, Social Security benefits accounted for $243 billion dollars of reported income in 2013, according to the Tax Foundation report, the sixth-highest income source. It’s a critical revenue stream for many of today’s retirees. For the rest of us? Maybe little more than a trickle. The latest estimate, released by the program’s trustees last July, estimates that after 2034 Social Security will only be able to pay about 75% of scheduled benefits.
Some stocks, mutual funds and exchange-traded funds pay out dividend income to shareholders. Finding such investments that offer some growth potential in addition to paying a dividend is practically portfolio nirvana. But dividends offer sweet, sweat-free paydays.
Retirement account distributions
This is down the list but a high priority for just about all savers: retirement income from our tax-advantaged accounts. Retirement account distribution strategies are often debated but never once-and-for-all decided. But you’ve got to build a balance first.
“America’s system of retirement accounts, while fragmented in several different programs, is taxed in a neutral way that removes the bias against saving,” Cole’s Tax Foundation report says. “Furthermore, it actually works fairly well at providing people income in their retirement. Notably, the income from retirement accounts is now a little bit larger than the investment income earned outside of that system.”
Retirees pulled $214 billion from their retirement accounts in 2013. You’ll want to make sure you have one to pull from too when the time comes.
Ah yes, that blast from the past: interest. Remember that? It’s been a while since any of us have actually seen interest paid on savings, and that’s why it’s at the bottom of the list. The $101 billion in interest income claimed by 2013 filers works out to about $690 per taxpayer. With the average savings account paying only about 0.06% interest in 2013, you’ve got to wonder: where the heck did this interest income come from? Well, there is corporate and municipal bond interest to consider, too.
These days, typical savings accounts are paying a little bit more – around 1% -- and interest payments may start getting closer to relevance as The Fed hikes the ball up the long and winding yield curve.
All the rest
Alimony, gambling proceeds, state income tax refunds, unemployment compensation and other sources of income are little more than ripples in the giant pool of American income sources. And a bit harder to initiate on your own.
But with a goal of creating as many income streams as possible, every little bit helps.