Income Is More Important Than Savings In Retirement

Imagine you’re going to go on a long trip; a vacation with your car and you’re told you can never stop for gas. Never fill up your tank. Now you’re allowed to fit as big of a gas tank as you can on your vehicle, but you can’t refill it. Whatever you start with, that’s what you have. How does this relate to retirement? Well in retirement it’s kind of like you can’t refill your tank because you’re not getting income or not getting a lot of income. If you retire, that means you stop working at your job. Certainly you may have a pension, you may have social security; but these aren’t really high probability, high income sources. 

Now you might say “that’s why I’m saving money for retirement, I have a 401K, an IRA, retirement funds”. That’s great, but that’s like your gas tank. It’s not the same as income. If you round numbers $100,000 a year, you’re making $100,000 a year, every month; you have income coming in. All of a sudden you retire, and that stops. Now all you have to spend is from your gas tank: your 401K, your IRA, your savings, and that’s going to dwindle down. You’re not putting more money in every single month. In retirement you have to look like you don’t need savings or an income. 

How can you have income if you don’t have a job? 

That’s the important thing, do the math; even if you have $2 million. $2 million  sitting in the bank, cash. If you want to take out the same $100,000 per year, that’s only going to last you 20 years. Now that might be enough when you retire, but you have to do the math. If you retire, let’s say age 60.  Now 20 years later, puts you only at 80. You might think that might be enough. What if you retire at age 70 that’s only going to put you to age 90. Some people live to be later than 90. The other thing is that’s assuming that your expenses are going to be the same. You’re making $100,000 a year, if you take $100,000 per year out now, it might work 10 years from now. There might be inflation, your health care costs might go up, you might not have health insurance, you have to pay out of pocket. Unexpected expenses for repairing your house, or  your roof. Assuming you have $2 million in cash. The key to it is, not trying to have savings, but trying to have income. 

How do you have income if you’re not working?

There’s things you can do to set that up. One could be you buy passive income. Buy real estate to rent out, however, there’s some risks involved. There’s a lot of things happening with the laws about rental prices. Increases rent caps and the rules about tenants being able to be evicted or not. You might not want to be dealing with that when you’re 70 years old. There’s other passive income sources that are less capital intensive: Dividend stocks or bonds. Those have a very low rate of return of 2/3%. That’s not going to really offer that much. Another way to do it is to have some type of a business venture that doesn’t require a lot of work. Where you would have to go to an office every day and spend 8 hours working with other people. It could be your own enterprise from your home. This is something you need to set up early. It’s not something you can start doing when you’re 70. 

A business enterprise may take 5 or 6 years to get up and running to the level that it’s going to produce an income. It may require a few attempts; the first one might not work and then the second one might not work. You might have to take 2 or 3 tries to get there, but it’s extremely important because now you’re giving yourself an advantage. If you have some income even if it’s $3-5,000 a month, your $2 million can last you longer instead of lasting 20 years. Maybe the last 30 years because you don’t have to take out the whole $10,000 every month. Right now we’re making some big assumptions, we’re assuming you have $2 million in the bank. 

What if you have no money in the bank or a very small retirement?

If you only have $200,000 in the bank for retirement; it doesn’t matter what your income is, it’s not going to last long even if your income is $50,000 a year. If you have $200,000 in the bank, in four years you’re done, you’re out of money. You need income more than you need savings, and creating that income is something you can start early. Start when you’re 40 or 50 or 55 or 60. There’s things you can do to create that source of income. it’s going to take some work, but it’s like investing time instead of investing money. It doesn’t cost you anything, or very small amount. A few hundred dollars for some costs, but generating that personal income, that will last forever. You may have to do a little work on it. 

We have people we know that their income is woodworking projects. They make little art things or practical things in their garage, in their shop, that they sell and they make $2-3 thousand a month and you could do that until you’re 80 if you want. There’s lots of people that are handy, maybe it’s something you do that’s crafty that you sell. You may have to pivot and change that over time. The important thing is doing the math on your retirement savings. How much are you going to have in savings when you retire, divide it by the number of years you think you’re going to live, and see where that puts you. If you have some income stream, even if it’s relatively small, it dramatically extends out that range. Kind of like the metaphor of going on vacation and instead of using all the gas in your tank; you can refill it every year, every week, every month. A little bit might still drain down over time, but at least it’s extending your range. You can make it farther on that tank of gas. Income is more important than savings in retirement. Creating that income source now will put you in a place where you can be more safe and secure in retirement. You don’t have to worry about running out of money and eating cat food.

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