In an ideal world, retirees would have so much money saved before retirement that they could hang up their hat without having to work for another dollar. However, portfolio income in retirement is a huge challenge for many retirees.
Unfortunately, for most people, having a nest egg – even a decent sized one – isn’t always enough. In fact, studies show that only 25% of retirees say they have no plans to work in retirement, meaning that most people will continue to earn income well into their golden years.
Worse yet is that 62% of those surveys said they will continue to work because of financial issues. This also means that some people may take a late retirement instead, or simply never retire at all.
For someone to truly enjoy retirement the way it’s meant to be enjoyed, they will have to find ways of generating passive income.
If you find yourself in a situation where you’re concerned about your post-retirement income and want to know how to make money without taking another job, here’s what you should know.
Retirement Income Challenges
There are a few reasons why a retiree may face financial problems well into retirement that prevent them from making the most of their time.
1. A lack of pre-retirement funds
Only 49% of American workers participate in a workplace retirement plan. Of the rest, one in three have no retirement savings plan in place, 56% have less than $10,000 saved, and just 18% have over $200,000 in a retirement account. Of those eligible to contribute to their retirement through an employer-based 401(k), 17% don’t contribute.
Even though these statistics take into account younger generations, in terms of those closer to retirement age (age 50+), the average amount saved for retirement is only $60,000. Not having enough money in the bank before retirement can create a large gap in income after retirement.
It’s very possible that retirement can last for 20 to 30 years, or more. Supporting lengthy retirements can eat through even the largest savings account, and most people simply don’t have the funds to cover an unexpectedly long retirement.
2. Prematurely raiding retirement accounts
Accidents, health problems, or job losses can damage pre-retirement savings. Without an emergency savings plan in place, some are forced to dip into their retirement accounts early, further damaging their access to usable income after retirement.
According to a retirement confidence survey, only 18% of workers say they’re “very” confident about having enough money for a comfortable retirement, while 24% are “not at all” confident.
3. Inflation and taxation
While current inflation rates are relatively low (1-3% today compared to 13% in 1981), it’s still an issue to consider, especially for those who experience longer than normal retirements. $1,000 today, for example, will only be able to purchase $552 in goods 30 years from now with a meager 2% annual inflation rate. With a 3% rate, that $1,000 will only buy you $412 worth of goods. If inflation goes up to 5% or 6%, the results could be devastating for those trying to live off fixed incomes.
Depending on where your retirement income comes from, it can also be taxed. Withdrawals from retirement plans, pension income, and investment income from non-retirement accounts are taxable. The only exception is money used from tax-deferred accounts structured as Roths.
If you face any of these challenges, you will need to find a way to create income after you retire in order to offset any potential setbacks.
Generating Income With Options
One of the best ways to do this is through investing. More specifically, by selling covered calls. If you’re not familiar with the idea of a covered call, here’s what to know.
A stock option – or the right to buy stock in a company at a discounted or stated fixed price – allows investors to buy and sell their share in a business. A covered call is a type of stock option where you sell (or “write”) call options against shares of stock you already own. You can also sell “puts” against stocks you want to buy, which is called a put option.
Call options provide the buyer the right to purchase a stock at a certain price, though they’re not obligated to actually buy the stock. Investors often purchase call options when they believe the share price will rise and they can sell later on at a profit.
When you sell a call option, you collect the premium (cash) up front, which you can use for income. In exchange for the premium, call sellers are obligated to sell their shares at the agreed Strike Price on or before the Expiration Date.
Put options provide the buyer the ability to sell at a specific price, also called a strike price. The writer of the put option is obligated to buy the stock at the strike price. Investors who are put buyers tend to be shareholders who want to protect their stocks from a steep price decline.
When you buy a put option, you pay cash up front, but in return you have the right to sell it at the strike price. If the stock drops below the strike price, you are protected from further price declines. The put seller gets to keep the premium even if they don’t purchase the shares prior to expiration.
While selling puts can be a great option for investors, it does require a substantial amount of cash set aside in your account in case you need to purchase the shares. Selling both calls and puts are great tools to enhance your long-term investment strategy. Neither should be used recklessly in the hopes of making a quick profit.
Ultimately, deciding if you will sell calls or puts depends on your goals as well as your financial stability. If you want to potentially buy a stock at a lower price, sell puts. If you want to potentially sell a stock at a higher price, sell calls.
Keep in mind that both options are part of a cash flow investment strategy that can generate income and reduce investment risks, though covered calls typically yield higher profits, which can offset the income challenges faced by many retirees.
Final Thoughts
If you’re concerned about your income after retirement, the good news is that you don’t have to be an investment expert to generate income with covered calls. Do-It-Yourself investors or those new to investing can choose stocks and sell options to help reduce the costs of retirement.
Remember that while all investment strategies do contain some risk, with the right strategy you can navigate through those risks in order to generate income when you need it the most. The time to plan for income in retirement is now, not
If you want to learn more about selling options to generate retirement income, we have several free courses available that cover these topics more in depth here.