In the past, most Americans retired comfortably with a monthly pension from their employer. However, those days are long gone. Now, pensions are a luxury commonly reserved for government workers. That means, for the rest of us, the burden of financing retirement falls primarily on our shoulders. Unfortunately, depending solely on Social Security and tax-advantaged accounts like 401(k)s and Roth IRAs can leave you vulnerable to market fluctuations. Thus, it’s essential to explore alternative paths to secure a fulfilling retirement.
- The first step you should take is to assess your finances. That will help give you a better understanding of your financial situation.
- To retire without a pension, consider spending less money, increasing your income, and applying for government benefits.
1. Assess Your Finances
Start by analyzing your monthly living expenses. Consider all aspects of your spending, including housing costs, utilities, transportation, food, healthcare, entertainment, etc. Take a closer look at how much you spend to identify areas where you can potentially cut back if needed.
Keep a close eye on your debts, such as outstanding loans or credit card balances. Understanding the magnitude of your debts will help you devise a plan to manage and potentially eliminate them as you prepare for retirement.
You should also check your savings, investments, and retirement accounts. If you aren’t saving already, it’s best to start saving for retirement as soon as possible. The last thing you want is to realize you can’t afford to retire once you reach your ideal retirement age and are forced to make drastic lifestyle changes.
Set aside an emergency fund in a high-yield savings account (HYSA) like Marcus by Goldman Sachs or Ally Bank. I have a regular savings account with Bank of America and a HYSA with Marcus. Ideally, you want to save at least 3 to 6 months of expenses for unexpected emergencies, such as a medical bill or job loss.
Once you have some funds in your savings account, consider investing in assets like stocks, bonds, or real estate. Retirement accounts like a Roth IRA or 401(k) have tax benefits that can help you save on your tax bill. For example, you would invest post-tax money into your Roth IRA, but your investments will grow tax-free. That means withdrawals at retirement have no capital gains taxes. With the 401(k), you invest using pre-tax money, so you lower your tax bill today and your investments will grow tax-deferred until you retire. You’ll pay taxes when you retire and start withdrawing funds.
2. Embrace Frugality
If you do not have substantial savings going into retirement, you may need to downsize your lifestyle and cut down on unnecessary expenses. If you frequently overspend, consider shifting your mindset and learning to spend intentionally and live below your means:
- Cook at home: Prepare meals at home instead of dining out or ordering takeout all the time. This simple change can save a significant amount of money over time while giving you greater control over your diet. If time is a concern, meal prep over the weekends, so you don’t have to cook as much during the week.
- Buy second-hand: Consider buying gently used items instead of purchasing brand-new ones. Thrift stores, online marketplaces, and community swap events can be excellent sources for finding quality items at a fraction of the cost. In the past, I’ve bought plenty of clothes from Goodwill, as well as furniture from Facebook Marketplace.
- Embrace alternative transportation: Reduce transportation costs by taking public transportation, carpooling, or walking and cycling whenever possible. Not only will this save you money on gas and maintenance, but it can also contribute to a healthier lifestyle.
- Trim subscriptions and memberships: Take a critical look at your subscriptions and memberships. Cancel those you no longer use or can do without, including streaming services, gym memberships, and other recurring expenses that may not align with your retirement goals.
- Embrace energy efficiency: Upgrade to energy-efficient appliances and use energy-saving practices within your home. This can help lower your utility bills over time, contributing to long-term savings.
3. Maximize Your Income Sources
In addition to embracing frugality, maximize your income sources. By exploring various avenues to increase your earnings, you can pad your savings and create a more secure financial foundation for retirement. Consider the following options:
- Negotiate for a raise. The most effective way to increase your income is to earn a raise or promotion at your current job. Create a game plan for negotiating with your manager or pitching a plan to clarify what it takes to earn a raise or promotion. Another option is to change jobs, which is how people get the biggest salary bumps over their careers.
- Rent out spare space: If you have an unused room or property, consider renting it out through platforms like Airbnb and Vrbo or looking for a long-term tenant. This can provide a steady income stream and help offset your housing expenses.
- Sell unwanted items: Declutter your living space and sell items you no longer need or use. Online marketplaces, such as eBay or Facebook Marketplace, are convenient platforms to reach potential buyers and convert your unused belongings into cash.
- Invest in dividend-paying stocks or rental properties: Consider investing in dividend-paying stocks or real estate properties. Dividend stocks offer regular cash payouts, while rental properties can generate ongoing rental income. You can also invest in real estate investment trusts (REITs) if you don’t have enough money or time to buy properties on your own.
4. Get Part-Time Work or Start a Side Hustle
Securing extra income through a part-time job or side hustle can help support your financial needs in retirement, particularly if you don’t have a substantial nest egg. While it may not be realistic to earn the same level of income as in your prime and fully maintain your previous lifestyle, having some form of income can alleviate some of your financial concerns. Here are some ideas to consider:
- Freelance writing or editing: If you have strong writing or editing skills, consider offering your services on a freelance basis. Many companies, publications, and online platforms require content creation or editing support.
- Virtual tutoring or coaching: Leverage your expertise and knowledge to provide tutoring or coaching services virtually. You can choose different subjects or specialized areas depending on your experience, catering to students or individuals seeking guidance and mentorship.
- Pet-sitting or dog-walking: If you enjoy spending time with animals, pet-sitting or dog-walking can be a rewarding and flexible way to earn income. You can use a site like Rover to get started or offer your services to friends, family, and neighbors.
- Handyman or home repair services: If you have practical skills and enjoy fixing things, consider offering handyman or home repair services. Help others with home maintenance needs, such as minor repairs, installations, or renovations.
- Personal shopping or errand services: Assist busy individuals with their shopping or errands. This can involve grocery shopping, running errands, or assisting with personal styling or gift selection.
- Vending at local fairs: If you’ve ever dreamed of becoming an artist, consider creating artwork to sell at local fairs and events. It’s a low-stakes way to explore your creativity while making a bit of money on the side. For example, a friend of mine runs Queer Art Faire, which hosts pop-up art fairs across the Bay Area.
5. Apply For Government Benefits
Don’t forget to explore and apply for government benefits. Social Security, administered by the Social Security Administration (SSA), offers income support to individuals who have paid into the program during their working years. To qualify for Social Security benefits, you need to have worked for at least 10 years and be at least 62 years old.
To estimate your potential Social Security payments, the SSA provides an online calculator that factors in your earnings history, retirement age, and anticipated income. The amount you receive will depend on your earnings and when you begin to collect benefits. Generally, the more you earn and the longer you delay collecting benefits, the higher your payments will be.
Keep in mind that Social Security payments typically replace only a portion of your pre-retirement income. The estimated average Social Security payout in 2023 is ~$1,827 a month.
In addition to Social Security, it’s crucial to consider Medicare, a government-funded health insurance program for individuals aged 65 and older. Medicare helps cover medical expenses, including hospital stays, doctor visits, prescription medications, and preventive services.
The Bottom Line
Retiring without a pension may seem daunting, but with careful retirement planning and a proactive mindset, you can retire comfortably. Embracing frugality, maximizing your income sources, and exploring alternative investment options can significantly contribute to your retirement savings and provide a comfortable lifestyle.