It’s fairly common knowledge that if you want to retire someday, you’ll need to save up a nest egg. The nest egg model is when you build up a portfolio of investments (typically using your 401k or IRA) and essentially live off of the returns they produce for the next 30 years or so.
While that may work for some people, what happens if you’ve never contributed anything to your retirement accounts? In this article, we’ll explore a few ways you could still retire without having accumulated any savings in your nest egg.
Wait! Isn’t working the exact opposite of what you want to do when you’re retired?
Yes, the general stereotype most people have about retirement is that you’ll spend your days sitting on the beach, drinking cocktails, and never lifting a finger or doing any labor ever again. But in reality, that’s not usually how it goes at all.
According to the NY Times, as many as 40 percent of retirees return to work after they’ve retired. Why? Sometimes its for financial reasons, but mostly its because they became bored. Remember that working can give you a sense of purpose and an opportunity to socialize with other people that might be lost completely when you separate from your employer.
In fact, embracing the idea of working part-time could actually be a helpful way to let you retire much earlier than you might expect.
As explained by financial guru Michael Kitces on the Bigger Pockets podcast, many people could side-step the traditional model of saving up some enormous nest egg if they instead make a simple commitment to work part-time doing something they love or enjoy doing.
How? Recall that the whole point of building up a nest egg is to produce retirement income. However, if you plan to work, even if it’s just a little bit, then the money you make could offset the size of the nest egg that you would traditionally need.
For example, if we assume a withdrawal rate of 4 percent from your nest egg, then we could easily calculate that it would take $300,000 of savings to produce $1,000 per month of retirement income. So if we say that you plan to work part-time and earn $2,000, that would be the equivalent of having a $600,000 nest egg.
Social Security Income
Everyone who’s worked in the U.S. and paid taxes has at some point paid into Social Security. And as a result, that could mean that you’re eligible to receive a paycheck from the U.S. government once you are of retirement age.
In 2020, the average Social Security benefit was $1,503 per month. Compare this to the nest egg model, and that would be like having an extra $450,000 of retirement savings.
To begin receiving Social Security benefits (without being disabled), you’ll need to be at least 62 years of age and have earned a certain number of “credits”. As of 2020, a credit is defined as $1,410 in income from employment where Social Security taxes have been paid.
Generally, you can earn up to 4 credits per year and need a minimum of 40 credits over your lifetime to qualify for benefits.
If you can help it at all, waiting to collect your Social Security benefits will make them increase. At age 62, you’re entitled to receive what’s called “reduced” benefits which is approximately 75 percent of your full amount. To get your “full” benefits (100 percent), you’ll have to wait until age 67. Your benefits cap out by the time you reach age 70.
If you’re feeling entrepreneurial, then you could look into leveraging rental income to fund your retirement.
Rental properties can produce anywhere from a few hundred to over a thousand dollars per month in passive income. Depending on how many properties you own, how much you paid for them, and what your monthly expenses are, your total net profits could be enough to replace working income.
For example, let’s say you’ve got 5 properties returning a net of $500 per month. That’s $2,500 of monthly income for you to cover your living expenses. Again, this would be the equivalent of saving up $750,000 in your nest egg.
Besides providing income, rental properties also have some other unique benefits that often get overlooked. For one thing, they’re tax-efficient because you can deduct depreciation and maintenance expenses that are needed to upkeep the properties.
In addition, the longer you own each one, the more equity you build. That means if you ever need to sell them one day, it could provide an immediate payout.
Downsize Your Home
Speaking of equity, if you’ve got a sizeable home or live in an area where the housing market has appreciated, then you may want to consider selling your home to produce some much-needed capital for retirement.
Downsizing has been an age-old strategy for many retirees for decades. Traditionally, as you’re raising a family, you might live in a 3 to 4-bedroom home that’s located in a nice neighborhood.
But as you get closer to retirement, you may not need so much house. Perhaps now it’s too big, too expensive, or just a hassle to upkeep. When that happens, many people have found it better to relocate to a more modest accommodation like a condo or smaller home.
For example, let’s say you live in a house that’s worth $350,000 and move to a condo that only costs $150,000. That’s $200,000 of equity that you can now use for retirement income.
Location can also play a factor too. If you live near an expensive city and can now relocate someplace different that’s more affordable, that could also be a way for you to maximize your equity when you go to move.
Simplify Your Lifestyle
Finally, one of the most effective and overlooked strategies for retiring without any savings or investments is to simplify your lifestyle as much as possible. Given that you’ll be retired, consider doing activities that will keep you busy but not require a lot of expense. For example, you might spend more time with family, volunteer, or participate in local community events.
To quantify the effect reducing your lifestyle expenses can have, think of every $1,000 less that you need per month in retirement as the same thing as eliminating $300,000 in your nest egg.
When you combine this fact with some of the other strategies above like relying on part-time work and Social Security, then retiring without a nestegg saved up should be simple and stress free.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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