7 Ways You Might Boost Retirement Income and Maximize Savings
Citi Personal Wealth Management
The notion of a safe retirement portfolio withdrawal rate has been analyzed extensively by academics and financial advisors, and many have come up with answers of around 3% to 4%. This figure, which includes any dividends and interest you receive, represents the percentage of a portfolio's value that these academics believe you can safely withdraw in the first year of retirement.
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 try to boost your income and maximize savings.
1. Act Your Tax Bracket
When you're working, if you're in the 28% or 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, taxable investments could leave you with less money in your pocket.
Once you are retired, that may no longer be true. Would taxable investments give you more after-tax retirement income than tax-free investments? Maybe it's time to run the numbers to see.
2. Smooth Your Income
Once retired, you will likely have more control over your annual taxable income. You may have a pension, Social Security retirement benefits, and the dividends and interest generated by your taxable-account investments. You will also need to take required minimum distributions from your retirement accounts after you turn age 70½, 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 could seize the opportunity to realize capital gains or consider converting part of your Individual Retirement Account to a Roth IRA. This may allow you to pay taxes at a lower rate today—and avoid bigger anticipated tax bills down the road.
3. Spread It Around
A diversified retirement won't stop you from losing money or guarantee a profit. It could, however, help you earn potentially higher returns for a given level of risk.
This is the reason investors are often encouraged to own a broad mix of larger US. stocks, smaller U S. companies and foreign shares. Don't, however, focus solely on your stock portfolio. You may want to take a high-quality bond portfolio and diversify it by adding riskier types of bonds, including high-yield junk bonds, developed-market bonds and emerging-market debt.
4. Cut Costs
You could also potentially increase income by favoring lower-cost retirement investments or asking your financial advisor to do so on your behalf. For example, that might mean favoring mutual funds with lower annual expenses and paying careful attention to the mark-up on individual bonds. Keep in mind that lower expenses does not guarantee that an investment will generate income.
5. Buy Lifetime Income
It's risky to use a retirement withdrawal rate higher than 3% to 4% because of the danger that you might outlive your savings. But what if you could eliminate or reduce that longevity risk? Therein lies the appeal of immediate-fixed annuities that pay lifetime income. 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.
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.
6. Wait a While
You could also increase your retirement income by waiting a little longer 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 can 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.
7. Get a Job
If you put off retirement by a few years, you will have additional years to save and to earn investment gains. In addition, because you will be older when you retire, you will receive more income when you claim Social Security or buy an income annuity. Also, consider the benefits of working part-time in retirement. That will give you additional income—and maybe also the sense of purpose that many retirees hunger for.
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