6 Tips on How to Maximize Your Income in Retirement
Paying the bills after you retire is quite different from during your career. After all, the income you receive will come from a variety of sources, as opposed as to earned income or a bimonthly paycheck.
Social Security, your own investment portfolio, a pension (if you are lucky), and maybe even part-time work can be sources of income that help pay for your retirement lifestyle.
The trick is therefore to maximize the total amount of income that you receive. But many Americans worry that they won’t have enough income during retirement to meet their needs.
The Alliance for Lifetime Income conducted a survey of 3,119 adults regarding their financial readiness for retirement. Eight in 10 (80%) of them expressed at least some level of concern that they won’t have enough income after they retire.
The survey revealed that 18% of the respondents were extremely worried about this. Meanwhile, 26% were “moderately” concerned and 36% were “somewhat” concerned about this issue.
Here are six key steps you can take now to avoid these concerns and maximize your income. You don’t have to wait until you are retired to start planning out the rest of your life.
Create Projections for Income and Spending
For starters, map out your future expected spending and what income you will need to sustain it. If it helps, use these questions to help frame everything.
What will your preferred lifestyle in retirement look like? How much will your monthly living expenses run? Housing, food & grocery, insurance, utilities, transportation, entertainment, and healthcare are a few categories of monthly spending for which you will need income.
What activities such as travel, home remodels, second-act careers, or other passions might you pursue? What costs might they add to your retirement spending apart from your recurring monthly expenses? This discretionary spending will be separate from your monthly must-have expenses.
Your current expenses and level of spending right now are great clue-ins for the future. Use them to estimate how much income you might need. Some expenses, like a mortgage and professional wardrobe costs, might not be around in your retirement.
An effective plan will break down these numbers into a snapshot of monthly income needs. Financial professionals recommend having a 30-year timeline (or, better yet, longer timeline) for what these numbers will look like.
Your advisor can help you put together an income plan with these numbers, based on your current financials.
Beef Up Your Retirement Savings
Now, you have an idea of how much retirement money you will need for a comfortable lifestyle. What if you have some retirement savings shortfalls?
It’s prudent to start playing catch-up now. This starts with contributions to your retirement accounts.
Make sure that you are receiving the maximum possible match in your employer retirement plans. What if you are over age 50? Then consider making additional catch-up contributions that will cause your plan balances to swell.
The sooner you can start doing this, the better. Time is literally money in this case.
Use the power of time to let your savings grow. You will also want to diversify your portfolio adequately. It’s particularly important as you near retirement, so you can have a well-defined balance of growth and income.
Tap into Vehicles That Pay Guaranteed Income
What if you still have an income gap? Then you might consider solutions that pay you a guaranteed lifetime income so you can cover it.
Annuities are among the best options if you are looking for an income stream that you can’t outlive. These unique instruments can allow you to maximize your retirement income over time and give you peace of mind that your money will never run out.
Annuities can often produce higher payouts that other types of guaranteed instruments due to their pooled risk and mortality credits. But make sure to shop around thoroughly to get the best deal, as insurance companies offer many annuity choices in today’s marketplace.
A fixed index annuity may be one possibility that you look at. Many of them come with income rider benefits that give you a lifetime income and some flexiblity with your money.
Indexed annuities pay interest that is based upon an underlying financial benchmark. One example of this benchmark is the S&P 500 price index.
When the benchmark goes up, your money earns interest based on a portion of that increase. When it goes down, your money is credited zero percent.
The actual growth of an indexed annuity isn’t guaranteed like it is with a fixed annuity. Nor is your money actually invested in that benchmark, its growth is just calculated based on its movements. But the total amount of interest that your money earns over time will likely be more than what you would earn in a fixed annuity.
Don’t hesitate to enlist the help of a financial professional when shopping around for annuities. Annuity contracts can have several moving parts that can affect your retirement strategy.
Maximize Your Social Security Benefits
If you can swing it, waiting until age 70 to claim your benefits is one of the biggest payoffs you can make. It can easily increase your lifetime income by tens of thousands, if not hundreds of thousands of dollars.
According to actuary Steve Vernon, the delay-until-70 strategy would solve the income problems of many retirees.
Not only would you see the benefit in lifetime income. You could see the value on a monthly basis, too. It would increase the amount of your monthly Social Security benefit by almost one-third.
For every year that you delay taking benefits, your benefits will increase by approximately 8%. So even if you can’t wait until age 70, delaying for a year or two after you reach your full retirement age can help a great deal. It doesn’t pay to delay past 70, as it’s the age when your benefit stops accruing.
Of course, this may necessitate you working for a few more years than you would like. But if you can stay in the workforce until you reach age 70, this increased benefit might well be a real advantage for the rest of your retirement.
Choose the Best Health Insurance Coverage
A chief concern of many retirees and pre-retirees is paying for healthcare after they have stopped working. The first step is to become familiar with Medicare and all of its options (which will take some time).
Don’t just stop at getting Medicare Parts A and B. This will leave major gaps in your coverage.
Worried about out-of-pocket expenses for healthcare? Then look at a Medicare supplement plan along with your basic coverages so that you are adequately protected from major medical bills.
It will add to expenses each month, but the health cost savings can add up over time. And you will be grateful especially if you are diagnosed with a major illness or become incapacitated.
Include the cost of all medical premiums that you will pay in your retirement cash-flow projections. That way you aren’t caught by surprise.
Minimize Taxes and Fees
Do you own any type of traditional IRA or qualified plan? In retirement, you will have to pay taxes on all of your distributions at your top marginal tax rate.
Your money can’t grow tax-deferred forever. Those required minimum distributions will come due once you turn age 72.
Consider converting some of the accounts into Roth IRAs or Roth qualified plans before you stop working. By doing this, you will have a way to pay the taxes due on the conversion.
If you are under age 65, you can roll over your pre-tax retirement accounts into a health savings account. You won’t have to pay any taxes on the rollover. Not only that, all distributions that are taken to pay for qualified medical expenses are tax-free.
This can be a particularly good strategy if you expect high healthcare costs during retirement.
If you own shares of company stock inside your 401(k) plan, you have other tax strategies at your disposal. Spinning those shares off and selling them under the net unrealized appreciation rule (NUA) will get you capital gains treatment on the sale.
What about fees on your accounts? Pay close attention to the costs and fees that you are charged for investment management and also inside your annuity contracts.
Guaranteed income riders in an annuity can provide protection for you, but they come at a cost. Some annuities — particularly and especially variable annuities — can be laden with fees for benefits that you might not need.
Be sure to check your contract carefully for those details. That can help you determine whether the fees you are paying, whether for investments, an annuity, or other financial products are worthwhile.
Need Help with Income-Maximizing Strategies?
These are just some of the things that you can do to maximize your retirement income. Consult your financial advisor for more information on what you can do to make the most of your retirement dollars.
What if you are looking for a financial professional to assist you? Or perhaps you just want another opinion of your retirement income plan. No sweat, many financial professionals are available at SafeMoney.com with just a few clicks of a button to help with your situation.
Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.