A crucial factor boosts happiness in retirement: 3 ways to obtain it

Retirees have had a tough time lately, according to them.

Recent data from the Employee Benefits Research Institute shows that less than half of retired Americans aged 62 to 75 are very satisfied with life in retirement, a decrease from 62% in 2020 and 53% in 2022.

Retirees are struggling financially due to inflation, with 68% reporting overspending and 68% carrying credit card debt, compared to 43% in 2020.

Despite the overall trend, some groups deviate from it. Specifically, retirees in good health and those who work with a financial advisor are more likely to report satisfaction with their retirement than their peers.

Among happy retirees, a guaranteed income emerged as a recurring factor, according to Bridget Bearden, a research and development strategist at EBRI and the study's author.

"Public sector workers have better outcomes than private sector workers because the data is very clear," she says. "Guaranteed income is a significant factor in retirement confidence, as indicated by various indicators."

3 ways to give yourself some guaranteed income

Fewer Americans are receiving guaranteed income through pensions, with only about 35% of current retirees having such income, and this trend is expected to continue.

In recent years, private companies have mostly abolished pension plans and instead require employees to save for retirement through workplace plans like 401(k)s. Only 15% of private industry workers had access to a pension in 2022, as per Bureau of Labor Statistics data.

Private pension income is unlikely to be a source of retirement income for most people, except for those who are public employees such as teachers, firefighters or military members.

While Social Security can provide some financial support in retirement, it's not enough to replace more than 40% of your pre-retirement income. Therefore, it's important to plan for the rest of your retirement needs.

To ensure a steady income in retirement, consider exploring alternative options. Unlike relying on regular withdrawals from investments, the unpredictability of markets makes income uncertain.

1. Annuities

An annuity, which is a product sold by insurance companies and guarantees a certain amount of income to the policy holder over a set period of time, is owned by approximately 8% of retirees surveyed by EBRI.

Generally, annuities involve a lump sum payment followed by annual payments at a predetermined rate of interest.

An annuity may provide guaranteed income, but the payouts are often less than what you could earn by investing in the stock market, according to Sam Dogen, a millionaire early retiree and founder of Financial Samurai. Additionally, annuities are typically more expensive and may come with higher fees than other investment options.

"Dogen argues that by investing in an annuity, you forfeit flexibility and limit your potential earnings, even with some of the higher-paying options."

An annuity may be suitable for an older retiree who lacks financial understanding and prefers not to manage their net worth, according to Dogen.

2. Dividend income

Dogen suggests that owning a diversified portfolio of dividend-paying stocks can be a great way to earn steady income in retirement.

He says that stock dividends are his preferred passive income strategy because it is completely hands-off.

Large, financially established corporations often return some of their earnings to shareholders in the form of a cash payment, called a dividend. To calculate the yield, divide the annual cash earnings per share by the stock price. This gives you the percentage of the money the stock pays out in relation to its value.

The average yield of stocks in the S&P 500 is 1.3%, while the average yield of "dividend aristocrats" is 2.4%.

Dogen suggests that if you have a diversified portfolio of high-quality dividend stocks, you can focus on earning a steady income from dividends, regardless of the stock market fluctuations.

To achieve long-term success in practicing a strategy to improve your retirement portfolio, you must be willing to accept potential declines in value over several years.

Over the long term, it is likely that your stocks will increase in value due to the historical upward trend of the stock market.

3. Real estate

Dogen suggests that owning rental properties can be a great way to generate consistent income during retirement, provided certain conditions are met.

"If you've owned rental properties for decades and they're generating huge cash flows, you don't want to sell them. Additionally, if these properties are close to your primary residence, you may want to give them to your adult children or let them manage them to keep them close."

If you want to earn money in real estate, it's important to understand that being a landlord involves work, which may not be what you want to do when you're supposed to be relaxing in retirement.

"The attractiveness of a property depends on the quality of its property manager. If you don't have one, it becomes less and less appealing. Dogen says that someone who is 60 or 65 and owns property without a property manager, handyman, subcontractor, plumber, or electrician will have a definite headache."

If you can delegate the management of real estate, it may be a viable way to add guaranteed income to your retirement plans. If not, you must decide if earning more money is worth sacrificing time in retirement to manage the inevitable issues that arise with owning a home.

"Dogen advises that while you may earn more from rental income and property appreciation with an annuity, the headaches will increase as your time becomes more valuable with age."

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