Some extra income in retirement goes a long way

Income in retirement

Obviously, for many people, income and retirement are not very compatible. The goal of most people is simply to not work in retirement. But many people want to retire earlier, and extra income in retirement may definitely help since it should make retiring easier.

We cannot count dividends as extra income in retirement since retirement is already based on dividends and capital gains. However, there are multiple other ways to generate extra income in retirement:

• Some people could do some part-time employment. Working one day a week can yield a significant income in retirement that can help reduce the needs of retirement. Examples could be working as a waiter or a barista or even doing some administrative work for a small company.
• Some people could do some side hustles. Examples could be doing some consulting or chores for other people (like dog walking).
• Some people could build a side business, like a blog or a small 3D printing venture.

Of course, there is also one major downside to income: income in retirement is not guaranteed. If you plan a partial retirement with 20% employment and you lose your side job, you may not be able to sustain your retirement expenses. So, planning for extra income in retirement needs careful planning.

Retirement of 30 years

To see the impact of some income in retirement, we will use my standard simulation:

• Use historical data from 1871 to 2025
• Each possible month is tested as a simulation starting point
• Use yearly rebalancing
• Use historical monthly returns from US stocks and bonds
• Use historical US inflation

A simulation is a success if there is more than zero left in the portfolio. Even a penny left at the end of the retirement period is a success. And the success rate is the percentage of simulations that ended up with a success.

If you would like to learn more about how I do these simulations, you can read about my updated trinity results.

We can start with a portfolio of 100% stocks and 30 years of retirement. We will use an initial value of 100,000 USD and add some extra income to see the impact of income in retirement. In these simulations, I will not adjust the extra income for inflation. So in practice, if you can manage to follow inflation with your income, you can expect even better results.

We can see that income in retirement significantly increases success rates. Even adding 5,000 USD extra income (per year) can significantly raise the success rate. This represents 5% of the expenses. Even that would potentially allow raising the withdrawal rate slightly. And achieving a higher income will raise our chances even more.

For instance, if you are looking for a 90% success rate, you could use a withdrawal rate of about 4.6% without income. But if you cover 20% of your expenses with income in retirement, you could go up to a 5.3% withdrawal rate. This means you would have to accumulate much less money for your retirement.

We can also see if these results are the same for a portfolio of 80% stocks and 20% bonds.

The scale of the improvement is comparable for the two portfolios. In both cases, we can expect a significant improvement to our chances of success by adding some income in retirement. To avoid filling this article with many graphs, we will only use these two portfolios. You can use the advanced FIRE calculator if you want to test adding extra income to your withdrawal simulations.

Of course, a retirement of 30 years is not very challenging to achieve. If you are looking for early retirement, you are likely aiming for more years, so we need to extend our simulation.

Retirement of 40 years

Let’s redo our simulation with 40 years of retirement to see the impact of income in retirement.

We can draw similar conclusions for 40 years of retirement as we did for 30 years of retirement. We can see that the magnitude of the improvement is more or less the same.

Again, we can take an example from these results. If you look for a 95% success rate, you would need a 3.9% withdrawal rate. But you could use a 4.2% withdrawal rate with 10% of your expenses covered by income in retirement. Even a 0.3% difference in withdrawal rate will make a very significant difference.

Let’s quickly see if this holds for our second portfolio.

Indeed, this still holds true.

We can draw a quick rule of thumb: in these simulations, by covering 10% of our expenses, we can increase the withdrawal rate by about 0.2% without changing our chances of success. And each extra coverage is better than the previous coverage.

Covering 10% of expenses with extra income is doable, but more than 10% will be a stretch for many people unless they are considering multiple days a week of work, which does not sound much like retirement.

Retirement of 50 years

Finally, we can continue our simulations with retirement lasting for 50 years. This is a long enough period to be useful for most people.

We can observe that income in retirement is slightly less potent than before, probably because we do not adjust the income for inflation. Over 50 years, this can make a significant difference. However, the effect is still very significant and on a similar scale as for 40 years of retirement.

We can take a final example from the results. If you want a 90% success rate, you need a 4% withdrawal rate without income. But if you manage to get 20,000 USD of income, you will only need a 4.6% withdrawal rate.

Finally, we can see if this stays the same for our second portfolio.

We can see that the results are really similar and the conclusions are the same.

A simpler way to look at income in retirement

Until now, we have assumed that extra income in retirement would help us use a higher withdrawal rate, which makes sense. But it is not very practical to calculate since you need a FIRE calculator to find out which withdrawal rate you can use.

Another simpler way to plan for extra income is to reduce the withdrawal amount accordingly. Indeed, if you get some extra income, you do not need to use your portfolio for so many expenses. For instance, if you are planning for a retirement with 60,000 USD per year and can get 12,000 USD income per year, you only need 48,000 USD from your portfolio. You can do some FI planning with this number instead. And this means it is easy to plan for extra income in retirement.

Again, I should emphasize that you should account for the probability of the income staying for long. If you plan for only 75% of your expenses and lose your side income, you will have to either cut down your expenses to 75% or go out of retirement (if possible).

Conclusion

The results are clear: even a modest income in retirement can help a great deal with your chances of success. As such, we can retire with less money or retire with more safety if we are capable of generating some extra income in retirement (outside of dividends).

Of course, the absolute numbers are highly dependent on the US data. Income in retirement will help in any country, but the scale of the improvement may be different.

Obviously, getting some income means doing some work. For some people, it is entirely acceptable if this helps them retire sooner, but many people want their retirement work-free. So, income in retirement will not meet all needs.

There is also one big downside to income: it is not guaranteed. It is essential to take this into account. If you account for a large income in retirement and you suddenly lose that income, you may be in big trouble. As a margin of safety, I would probably account for a portion of the income in an FI plan.

On our side, we are too far from retirement to know whether we will have any income in retirement or not. However, I can imagine that the blog is still generating some income when I quit my main career. Once I am closer to retirement, I will plan accordingly.

If you want to learn more about income in retirement, you should read about the impact of social security on early retirement.

What about you? Are you planning to retire with some income or income-free?