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10 Ways to Pay for Retirement

Emily Brandon

Workers tend to get the bulk of their income from a single job. In retirement, you're much more likely to have a variety of sources of income, including Social Security, a 401(k) or IRA, and other savings or investments. Here are 10 of the most common ways to pay for retirement:

Social Security. The majority of retirees say they rely on Social Security as a major (57 percent) or minor (27 percent) source of retirement income, according to a recent Gallup poll of 1,016 adults. The importance of Social Security is also growing among people who are still working. The proportion of workers expecting to rely on Social Security as a major source of retirement income has grown from 27 percent in 2007 to 33 percent in 2012.

Retirement accounts. The majority of workers no longer think they can count on a 401(k), IRA, Keogh, or other retirement savings account to fund their retirement years. While more than half (52 percent) of workers said their retirement account would be a major source of retirement income before the recession in 2007, just 46 percent of employees feel that way now. And only about a quarter (24 percent) of retirees count their 401(k) or IRA withdrawals as one of their major income sources.

A pension. Almost half (49 percent) of the retirees surveyed are fortunate enough to receive traditional pension payments. But only 28 percent of workers expect a traditional pension to be a major source of retirement income, down from 31 percent in 2007. "There's a generational change in that older people who are already retired tend to be more likely to have pensions," says Dennis Jacobe, Gallup's chief economist. "Younger people aren't as likely to have pensions. They tend to expect to depend more on things like their 401(k)s and personal accounts."

Part-time work. The majority of workers (71 percent) are hoping a part-time job will give their retirement finances a boost, Gallup found. "Income from part-time employment takes pressure off a retiree's investment portfolio to generate returns year after year," says Michael Pace, a certified financial planner in Seattle. "And there are additional, non-monetary benefits that are often received, the chief of which is that part-time work helps keep the retiree connected to other people." However, far fewer retirees surveyed (20 percent) are actually currently working part-time. "A lot of people who intend to work in retirement have health problems and aren't able to continue to work," says Jacobe.

Savings accounts or CDs. Perhaps due to low interest rates, the proportion of retirees who count savings accounts or CDs among their retirement-income sources has declined from 57 percent in 2007 to 50 percent in 2012. Worker interest in these conservative savings vehicles has declined less sharply from 71 percent in 2007 to 68 percent in 2012. "CDs and savings accounts give you protection of principal, but right now, they aren't giving you much of anything on the interest side. You are probably taking a loss after taxes and inflation," says Russell McAlmond, a certified financial planner and president of Evergreen Capital Management in Portland, Ore. "Use these only for purchases you are going to make in the short term."

Home equity. Just under half (47 percent) of retirees are planning to use equity built up in their home to help finance their retirement years. Even more workers (60 percent) are hoping their home equity will give their retirement finances a boost. "Presuming a retiree has a home that is paid off or will be paid off during retirement, the home could be used as a pool of funds to help fund needs or goals during retirement via the use of a reverse mortgage," says Pace. You could also downsize to a smaller home or move to a more affordable part of the country and use the profit to help fund your retirement.

Stocks or stock mutual funds. Just over half (53 percent) of workers plan to keep some money in the stock market to help finance their retirement years, down significantly from 63 percent in 2007. Only about 42 percent of retirees say they receive income from stocks or stock mutual funds. "You need some growth component in your portfolio, such as individual stocks or mutual funds," says Robert Aylin, a wealth manager for PrairieView Partners in St. Paul, Minn. "We think it's pretty important for most people to have equity or stock exposure to be able to preserve their buying power."

Annuities or insurance plans. Interest in annuities and insurance plans as a way to pay for retirement is declining among workers, from 44 percent in 2007 to 34 percent in 2012. Just under a third (31 percent) of retirees are using an insurance product to help fund their retirement years. "You can take a lump sum that you have saved and create a contract with an insurance company and guarantee an income that you are never going to outlive," says Aylin. "Having that fixed income every month that you know will always be there can be a real added value."

Rent or royalties. Just over a quarter (27 percent) of workers are creating works or buying property that they hope will provide them with an additional stream of retirement income. And 19 percent of retirees say they are currently receiving rent or royalty payments.

An inheritance. Some 15 percent of retirees are financing their lifestyle with the help of an inheritance. And just over a third (34 percent) of workers are hoping that inherited funds will help them pay for retirement. But pinning your retirement hopes to inherited funds is not a solid strategy. "There could be health issues that could cause that inheritance to be wiped out by medical costs," cautions McAlmond. "There is no way you can be absolutely sure what you will be inheriting."

Twitter: @aiming2retire

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