5 Simple Ways to Maximize Your Income during Retirement

5 Simple Ways to Maximize Your Income during Retirement

One of the most pressing concerns for people nearing retirement is the possibility of running out of money. Unfortunately, this fear is grounded in reality. The Employee Benefit Research Institute (EBRA) reports that more than 80 percent of Baby Boomers in the lowest income quartile will run out of money within two decades of retirement. In the second income quartile, nearly 40 percent of them will run out of money during the same time period. The decisions that lead up to retirement have the biggest impact on whether or not people will run out of money. Obviously, more savings provides a larger cushion. However, you also need to be careful about how you spend during retirement and the strategies that you use to maximize your retirement income. Following are some tips to keep in mind to get the most out of your nest egg.

 

1. Make the most out of Social Security.

While the average Social Security benefit is rather modest, individuals can take steps to increase their payout. In the most basic sense, Social Security increases when you work longer and make more. A Social Security benefit is calculated using the 35 highest-earning years of a person’s career. In addition, people should plan to delay claiming the benefit until age 70. For each year that you delay past the full retirement age up to 70, the benefit increases by 8 percent. For many retirees, Social Security accounts for a large chunk of their monthly income, so it makes sense to try to make the most of it. Households with two claimants can receive more than $3,000 each month with some planning.

 

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2. Take steps to minimize taxes due at the end of the year.

Another approach to maximizing your retirement income is to minimize your taxes. Each person will have different options for reducing their taxes depending on the types of investments made leading up to retirement. You should conduct an inventory of your taxes to figure out where you can save money. Often, people have mutual funds that spin off distributions without their knowledge and lead them to owe taxes. Shifting to funds that are more tax-efficient can protect your bottom line and keep more money in your retirement account for use later on down the line. Typically, individuals should keep their taxable income under the Social Security taxation threshold and pull from untaxed sources beyond that amount. The strategy can also keep households at the zero-percent long-term capital gains tax rate, which will enable them to sell appreciated investments without the need to pay taxes on them.

 

3. Diversify your monthly income streams as much as possible.

People with multiple sources of income in retirement will rely less on their savings, which means that the money they have set aside lasts longer. Several different strategies exist for diversifying your income. Some people may have a pension, especially if they served as firefighters, teachers, or police officers. However, other options exist. People can consider obtaining a rental income by offering up a spare room or perhaps even a finished basement. Families sometimes choose to rent out their entire home and move into a more modest space in order to reduce their monthly costs. Reinvesting a portion of this income in more real estate can grow monthly income. Another option is to obtain a part-time job. This option is ideal for people who are bored and wonder what they will do with so much free time. A part-time job can be a great way to get out of the house and earn a bit of extra money.

 

 

4. Develop a strategic plan with the help of an experienced financial advisor.

While not all financial advisors understand the unique needs of retirees, those with experience in this area can offer guidance on making the most of your savings. For example, financial advisors often suggest that people delay distributions from tax-deferred accounts so that their money is allowed to grow in them without tax implications for as long as possible. However, beginning at age 70½ you must annually take required minimum distributions. The value of the account will partially determine your minimum required distribution. Pulling from a tax-deferred account can mean smaller minimum distributions and save you money on taxes down the line. Furthermore, taking 401(k) distributions before claiming Social Security benefits can minimize tax implications. While balancing distributions from so many different accounts can become complicated, a qualified financial advisor can help to create a strategy that aligns with your life situation and financial needs.

 

5. Create a realistic budget.

One of the best strategies for maximizing your retirement income involves creating a budget. Retirees should understand how much money they have available from different sources and how much they will need in order to make ends meet. With this information, it will become easier to figure out strategies to address any issues. Your budget needs to account for changing needs down the line and economic shifts, such as inflation. Someone who retires at 60 will likely live to be about 90 years old, if not older. At the current rate of inflation, that means a person would need a monthly income that is three times as high. Yearly raises are crucial in order to ensure that people do not end up with less money than they expected.