Can you remember back to your days in science class? For some of us, that’s thinking a long way back! In that class, you learned about bodies of water—rivers, streams, ponds, lakes. You discovered that some lakes are formed when rivers and streams flow into them. In open lakes, water also leaves by a river or stream. Water flows in and flows back out.

Think of income streams as small rivers of money that feed into one big lake called a retirement fund. The more of these rivers you have, the bigger the lake gets. Then, in retirement, you can take money out of your fund. . Money flows in while you’re working and money flows back out in retirement.

Why Do I Need Income Streams in Retirement?

Back in the day (1960 to be precise), the average lifespan of an American male was 66.6 years. In 2010, the average was 75.7 years. In other words, people are living longer after they retire. But that creates a problem: outliving your retirement income, or running out of money to live on. Not good.

Having as many rivers (sources of money) as possible flowing into your lake (retirement fund) can protect you in case one income stream dries up (like a pension or Social Security payouts). And, if you want to retire early, multiple streams are a necessity since you can’t take money out of some funds, like your 401(k), until you reach a certain age.

What Income Streams Should I Consider?

What income streams you create will depend on your financial situation. If you’re still paying off the mortgage, you won’t be working on buying extra real estate. However, if you’re debt-free and have your emergency fund in place, you can start putting money into these buckets. Here are a few to consider:

Tax-favored investments. A workplace 401(k) or 403(b) and IRAs (traditional and Roth) all fall into this bucket. Obviously, you want to invest the maximum amount in these first because you get tax breaks on them. If available to you, invest in a Roth 401(k) or a Roth IRA. You’ll pay taxes on the money before you put it into the accounts, but any interest earned on these grows tax-free. And you don’t pay taxes on the money when you take it out in retirement.

Taxable investments. Once you’ve hit your yearly contribution limit for your 401(k) and IRA, you can put money away in a mutual fund that doesn’t get special tax treatment. Why would you want a mutual fund that doesn’t give you tax breaks? Because you don’t have to wait until you’re 59 and a half to take money out of it. This can be an important source of income if you plan to retire early. You can take money out of taxable investments at any time.

Extra savings. Yes, you should have that emergency fund of 3–6 months of expenses. However, on top of that amount, you can put extra money away into savings. There are a couple of reasons you’d want to bulk up your savings account. First, you have immediate access to the money, whereas taking money from a mutual fund could take a few days. Second, you can take out money from this account if you’re not yet old enough to take out money from workplace retirement accounts or Social Security.

Social Security. Yes, you can consider this as an income stream—but a very small one. Always think of this payout as icing on the cake, not the cake itself. Why? Because the average retired person will get $1,360 a month in 2017. That’s a little more than $16,000 annually. The federal poverty level for one person is $12,060. You don’t want to live on that little. And you definitely don’t want to base your retirement on the government giving you money. That’s a bad financial strategy.

Your house. Your paid-for home can be another bucket of money, especially if it’s bigger than you need now that the kids have flown the coop. You can sell that huge house, buy a smaller place with cash, and invest or save the remaining money.

I get it. Your home represents decades of life together and it carries sentimental value. Selling your home may be tough. Remember this: You store those experiences in your heart, not in the walls. You take your history to the new home. You’ll make new memories there too.

Real estate. Lots of people purchase land or rental property as an investment. This can be a viable income stream, but only if you do your homework before you buy. Find out the property values and average rent in the area. Do your research on the neighborhood. Talk to people who’ve been in the business a while. Know the pros and cons. And never, ever go into debt to purchase real estate. You’re just robbing yourself.

Part-time job. I know, you’re building wealth so you don’t have to work anymore. But hear me out. There’s a difference between working full-time at a place you dislike and working part-time at the job of your own choosing. A part-time job may mean tutoring school children. It could be a new business you’ve always wanted to open. Or you could turn a hobby into a money-making trade. You may want to work after you retire!

You don’t need to put away money in every one of these buckets. On the other hand, the more buckets you have, the more options you have when it’s time to retire. And that’s especially important if you plan to retire early—which we all want to do!

How Do I Create Income Streams?

If you have an emergency fund, you’ve created one stream. Your workplace 401(k) is another, so make sure you’re maxing out that fund. If you’re ready to create more streams, I recommend talking with an investing professional. They will know the best options based on your risk tolerance, financial situation, and when you hope to retire. Think of them as the river guide, getting you to your retirement destination. They can direct you, but the work is up to you!

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