Multiple Streams of Income

How can multiple streams of income help? If you are approaching retirement or even if you are retired and you realize you just did not save enough money and now you are worried about how you are going to make ends meet, don't fret! Do you remember what we called the Sixth Step to Financial Freedom which has many titles all of which point to the main idea of having many different sources of income? Well this is the same concept except it is a way to save for retirement that will allow your leisure years to be much more enjoyable because you will have multiple streams of income to rely on.

IRA/401(k) Catch-up

For 2009, an individual can put away $5,000.00 per year into his/her IRA and an extra $1,000.00 (total 6K) if you are 50 or over. In a 401(k) plan, an individual can put away up to $16,500.00 per year plus an extra $5,500.00 (total 22K) if you are 50 or over. Please note that you can save in both these vehicles at the same time and sock away up to $28,000.00 as long as you can meet certain income limitations.

It will then grow tax deferred. The income limitations for tax deductibility on the IRA are as follows: fully deductible for single tax filers up to $53,000.00 in annual earnings and phase out at the upper limit of $63,000.00. Married tax filers filing jointly have a full deduction up to $85,000.00 in earnings with a phase out above $105,000.00. Roth IRA contributions and catch-up are the same as the traditional IRA mentioned earlier. Since Roth contributions are not tax-deductible, the income limitations deal with your ability to contribute to a Roth in the first place. They are as follows: Single filers can make a full contribution as long as their income does not exceed $105,000.00 per year. The contribution limit phases out gradually as your income approaches $120,000.00 at which point it is phased out. Married filers filing jointly can contribute as long as their income is below $166,000.00. It then phases out completely at the upper limit of $176,000.00.

The last word on 401(k)'s was mentioned in the 9 Steps To Financial Freedom section but it is so important, it bears repeating. Many companies offer some sort of match for your 401(k) contributions. An example of this is that the company will match .25 for every dollar you put in up to some limit such as $2,000.00. THIS IS FREE MONEY. DO NOT PASS IT UP. (Yes I'm shouting !) This is the first of any of your savings choices that you need to max out before moving to another saving vehicle.

Annuities

You say you don't have a pension. No problem. You can buy a neatly packaged pension otherwise known as an annuity. Annuities come in many flavors so a little homework is in order.

Since this is a tax-deferred savings instrument with some of it's own pluses and minuses, a person should generally max out any other tax-deferred account first (401(k) or IRA) before deciding upon an annuity. Keep your streams of income in the right order.

The two most common types are an Immediate Annuity which as the name implies, starts to pay you right away and a Deferred Annuity which pays you down the road. If you are close to retiring you would pick the former and if you had some years to go before retiring you would pick the latter. Additionally, both types can be purchased with a fixed income stream as in a Fixed Annuity or if you want to take your chances and reach for a higher payment, (because you now know about Risk & Reward), you could pick a Variable Annuity which is subject to the vagaries of the stock market. All variable annuities are basically a mix of mutual funds wrapped inside an insurance package. The mutual funds are known as the sub-accounts when you choose a variable annuity you will generally be picking from different sub-accounts. Because this is an insurance product there generally is a commission involved. This fee will take a small slice out of your overall return. The other big negative is a surrender charge if you try to cash out the annuity right away, but this disappears slightly every year until it is eliminated usually after year seven. The money you invest in an annuity grows tax-deferred until you start to make withdrawls. At that time the principle comes back to you tax free while you pay regular taxes on the interest. The biggest advantage of an annuity is that there is no limit on how much you can put away. This amount then grows and compounds tax-deferred! An Annuity stream of income is very appropriate for many people. Maybe you too?

Reverse Mortgages

Hopefully you don't have a mortgage anymore (or at least not much of a balance left) which means the house you are living in is probably your single biggest asset. A reverse mortgage could be the answer to your prayers. As long as you are 62 or older, you can tap into your home equity and you will not have to repay the mortgage at all until you either move out or die. This includes your significant other also. The older you are the more you can receive because the lending institution will not have to wait as long to get their money back. Also, the more valuable your house is the larger the amount of money you can receive. The biggest negative is the hefty up front fees you have to pay to obtain the mortgage. That being the case, you would want to investigate other sources of funds first. Maybe a home equity line of credit would serve you better? Another negative is the loss of equity in your home that would otherwise go into your estate and would have been left to your heirs.

Although it is possible that after you are gone, the sale of the house could satisfy the reverse mortgage and still have some funds left over for your estate. You can take comfort in knowing that you would never owe more than the house is worth, no matter how long you live. Should you decide to go this route, you still need to pay your real estate taxes and home owners insurance premiums as these obligations arise.

These are a few potential streams of income. Can you think of other streams of income?

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