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Academics and financial advisors have extensively analyzed the concept of a safe retirement portfolio withdrawal rate, and the consensus often hovers around 3% to 4% per year. This figure, which includes any dividends and interest you receive, represents the percentage of a portfolio's value that experts believe you can safely withdraw yearly in retirement in average market conditions.
If you withdraw significantly more than 4%, you could increase the risk of running out of money later in retirement. But if you need more income, consider the following seven ways to think about potentially boosting your income and maximizing savings.
When you are working and are in a higher federal income tax bracket, holding tax–free investments may make sense. Yes, taxable investments might offer higher yields, but once you factor in the taxes involved, those types of investments could leave you with less money in your pocket.
Once you are retired, that may no longer be true, since you will likely be in a lower tax bracket. Would taxable investments give you more after–tax retirement income than tax–free investments? Maybe it's time to run the numbers to see.
Once retired, you will likely have more control over your annual taxable income. You may have a pension, Social Security retirement benefits, or the dividends and interest generated by your taxable-account investments. You will also need to take required minimum distributions from any Traditional IRA accounts after you turn age 70 and a half, to avoid tax penalties.
But that may still leave you with a fair amount of financial flexibility, and you might want to discuss your situation with a tax professional. For instance, in years when your taxable retirement income is relatively low, you might consider seizing the opportunity to realize capital gains or consider converting part of your Individual Retirement Account to a Roth IRA.
A diversified retirement portfolio won't stop you from losing money or guarantee a profit. It could, however, help you earn potentially higher returns in exchange for a given level of risk.
This is the reason investors are often encouraged to own a broad mix of larger U.S. stocks, smaller U.S. companies, and foreign shares. Don't, however, focus solely on your stock portfolio. You may want to think about a high–quality bond portfolio and/or riskier types of bonds, including high–yield junk bonds, developed–market bonds, and emerging–market debt depending upon your financial situation, comfort–level with risk, and needs.
It might be risky to use a retirement withdrawal rate higher than 3% to 4% because of the danger that you might outlive your savings, and even then, the rate may need to be adjusted depending on market conditions. But what if you could somewhat reduce that longevity risk? Therein lies the appeal of immediate–fixed annuities that pay lifetime income, subject to risks. With these annuities, you hand over a lump sum of money to an insurance company in return for a check every month for the rest of your life. Bear in mind that guarantees, including interest rates and subsequent payouts, are based on the claims–paying ability of the issuing insurance company, among other risks.
An income annuity may pay you more than 4%. The older you are when you purchase an annuity, and the higher the prevailing level of interest rates, the more income you may receive. But that income comes with a big risk: If you die at a relatively young age, you will have received relatively little income in return for your big annuity contribution, but you can set up an annuity to pass on income to beneficiaries.
You could also increase your retirement income by waiting a little longer up to your full retirement age to claim your Social Security retirement benefit. Indeed, you can think of Social Security as similar to a lifetime–income annuity, but with the added advantage that Social Security benefits currently rise periodically along with inflation. You might be able to claim Social Security as early as age 62 and as late as age 70. Delaying can boost your monthly benefit. But as with the annuity, that increased Social Security benefit comes with risk: If you die early in retirement, you may have missed years of Social Security checks and received little or nothing in return.
Consider the benefits of working part–time in retirement. You can supplement your Social Security benefits or income annuity, or perhaps delay withdrawals if your part–time salary sufficiently covers your expenses. Maybe you will also find the sense of purpose that many retirees hunger for. If you are younger than the full retirement age and you decide to both collect Social Security and work, your benefits may be reduced, so check with the Social Security Administration.
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Here is a brief overview of some factors to consider when choosing an IRA.
Learn the basics of when and how to rebalance your portfolio.
Review different scenarios for when taking Social Security may make sense for you.
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