5 Ways To Generate Retirement Income
How to Generate Retirement Income
One fear many people have is outliving their retirement income. To avoid that result, you should plan how you will generate the income you need in retirement. Don’t “wing it.”Instead, carefully consider how to allocate your investments between low- and high-risk instruments. You should meet with a financial advisor to discuss your investment strategy and how you will withdraw the money once you are retired. If you don’t know how much money you’ll need, then talk to financial advisors to calculate that first.
Generating Less Risky Income
Calculate your expected Social Security benefit.Financial advisors recommend that you cover your basic living expenses with guaranteed retirement income, such as Social Security. You should calculate how much you are likely to get at your retirement age. Visit the Social Security Administration’s website at . You can create a username and password.
- You are entitled to start receiving benefits at age 62. However, the amount you receive will be less than if you wait.
- You will earn more if you wait for your full retirement age. This age differs depending on when you were born. If you were born in 1960 or later, then your full retirement age is 67. If you were born in 1954, then your retirement age is 66.
- If you defer receiving Social Security until age 70, your monthly benefit will likely be even greater. Generally, you can get a credit of 8% per year that you wait past your full retirement age.
- Consider your “break even” point. This is the point when your cumulative income from starting income at an older age becomes larger than your cumulative income from starting at a younger age.Compare this break even point with your life expectancy. If you are in poor health, you might want not want to wait to receive benefits.
Purchase certificates of deposit.You can buy a CD from a bank. It is insured by the Federal Deposit Insurance Company. CDs can be issued in any denomination and have different maturity dates when you can cash them in.However, the longer you hold your CD, the higher the interest rate will be.
- CDs are very safe. However, they don’t generate as much income as other investment options. As with all investment, you trade must accept greater risk for a greater return on investment.
- You can withdraw money early from a CD, but you’ll pay a penalty.
Buy bonds.A bond is a debt instrument issued to raise capital. As the purchaser, you are entitled to payment on the maturity date for more than the face value of the bond. Bonds are issued by governments as well as by private businesses.
- Government bonds are generally safer than private business bonds (although this depends on the government and the business). The United States Treasury bonds are the least risky.
- Bonds are riskier than CDs, so they provide more income. However, you might not be able to generate sufficient income with bonds. Accordingly, bonds can be a hedge against riskier investments but they probably can’t be your only investment.
- If you are in a higher tax bracket, you might want to consider municipal bonds, as they are usually tax-free.
Purchase an immediate fixed annuity.An annuity is a contract from an insurance company.The company sells you a contract, which entitles you to guaranteed (fixed) monthly income for life (or for a set amount of time that you choose). Annuities provide reliable income you can use to cover basic living expenses.
- The amount paid out to you will depend on a variety of factors, such as your age and sex, as well as the amount of money you spend to buy the annuity. For example, a 65-year-old man who invests 0,000 in an annuity can expect to receive a little over ,000 per month for life.
- If you buy an annuity, you can’t dip into the principal when you want it. Instead, you get only the regular monthly payment as agreed in the contract.
- Because annuities will depreciate due to inflation, you should consider an inflation-adjusted annuity. However, it will have a lower initial payout.
- Search wisely for an annuity. They aren’t protected like bank savings accounts, so if the insurer goes bankrupt during an economic downturn, you lose your money. Only buy from an insurer that has the highest rating from Standard & Poor’s and Moody’s.
Chasing Higher Returns on Investment
Consider a variable annuity.Annuities are generally safe and predictable sources of income. However, you can increase the amount by purchasing a tax-deferred variable annuity with a guaranteed income feature.With a variable annuity, you can allocate your investment to different mutual funds.
- Your monthly payment will depend on how the subaccounts perform.This is the source of risk and also the reason why a variable annuity might pay you more than a fixed annuity.
- You can get a variable annuity with a guaranteed income rider, guaranteed death benefit, or a minimum rate guarantee. You will have to pay for these. These riders can protect you by guaranteeing a minimum payout regardless of how well the subaccounts perform.
- Always pay attention to the fees, which can add up quickly on this type of annuity. You’ll be charged investment management fees, administrative fees, and charges for your rider.
Invest in stocks.Stocks are more volatile and, thus, capable of generating more income than bonds and CDs.You can invest in stocks through your employee-sponsored retirement account, an IRA, or a broker.If you want income to grow during retirement, stocks should be part of a well-balanced investment strategy.
- Realize, however, that even blue-chip stocks carry risks, and they don’t promise to pay any fixed amount like bonds do.
- You can mitigate against this risk by purchasing a mutual fund, which pools together the money of many different investors. The fund then typically buys stock in many different companies.
- Mutual funds are best if you don’t have the time to evaluate stock on your own.
Find dividend-paying stock.Some stock pay a portion of their earnings to stock holders based on how much of the company’s stock they own. Most companies that pay dividends pay four times a year.
- Since 1928, dividend stock has averaged annual returns of 9-11%.
- You can purchase dividend mutual funds and exchange-traded funds (ETFs) to add diversity to your portfolio.
Managing Your Portfolio
Adjust your asset allocation, if necessary.As you approach retirement, you might want to reallocate the investments in your portfolio. For example, you might want to avoid stock market volatility by moving into safer assets, such as bonds or money market accounts.
- A conservative portfolio might have 50% bonds, 30% short-term investments like money markets, and 20% equities.
- Some advisor recommend that you start retirement with 60% in stocks and the remaining 40% in bonds and cash investments.Discuss your comfort level with your financial advisor.
- As you grow older, you’ll typically want to make your allocations more conservative by reducing your investment in stocks.
Come up with a withdrawal strategy.Growing your nest egg before retirement is only half the battle. You must also come up with a strategy for preserving as much of your nest egg as possible throughout your retirement. For example, if you take too much out too soon, then your retirement account might be depleted earlier. Work closely with your financial advisor to draft a sensible withdrawal strategy based on your financial needs.
- The safest withdrawal strategy is to spend only the interest or dividends generated by your retirement portfolio. Although this will stretch out your nest egg, you will also get less money each year.
- You can also cautiously withdraw principal each year. For example, calculate 4% of your savings at the beginning of each year and then divide by 12. This will give you a monthly paycheck. If you follow this strategy, there is a 90% chance you won’t outlive your income.
- You can also use both strategies. For example, early in your retirement, you can use only interest and dividends. Once you reach your late sixties, you might want to start drawing principal.
Withdraw mandatory minimums, if required.Once you reach age 70.5, you must make mandatory minimum withdrawals from your 401(k), 403(b), and a traditional IRA. If you don’t, then you’ll pay significant penalties.
- The minimum amount will depend on the balance of your account and your age. You can use an online calculator, such as the one at Kiplinger, to calculate.
- However, you don’t have to spend any of the money you withdraw. Instead, you might want to reinvest a portion in different investment vehicles. For example, you could invest the money in stock (if you’re feeling aggressive) or in CDs (if you aren’t).
Rebalance your portfolio annually.Market conditions change, and you might want to change the allocation of your investments between stocks, bonds, and cash. At least once a year revisit the allocation of investments in your portfolio.
- Always work with your financial advisor. As you age, your targeted balance will likely change as well. Discuss which balance makes the most sense for where you are in your retirement.
Earning a Paycheck in Retirement
Keep working at your job.If you are worried about having enough retirement income, then consider staying at your job. Although you might have planned to retire at 67, you may want to work for several more years. This will allow you to continue to pay bills without dipping into your retirement accounts, and you can also continue to save money for the day you finally call it quits.
- If you work while drawing Social Security, then you may reduce your benefit depending on how much you make. For example, you can earn up to ,720 per year (as of 2019) without penalty if you take benefits before your full retirement age. But for each you earn over this limit, you’ll see your benefit reduced by . This reduction is only temporary, however. You will get full benefits when you reach full retirement age.
- In the year you reach your full retirement age, you’ll get ,880 (as of 2019) without penalty. But for each you earn above this limit, you’ll see a reduction in your benefit.
- In the month you hit your full retirement age, you’ll no longer see a reduction regardless of what you earn.
Pick up a part-time job.Once you leave a full-time job, you don’t need to stop working altogether. Retirement is a great time to pursue interests you never had time for when you worked full time. Break out into a different field, such as writing, arts and crafts, or blogging. Now is the time to discover new talents.
- Many of the largest businesses in the country hire seniors as part-time workers. You can find part-time work by visiting the Seniorjobbank.org website or by searching the job section in the AARP website.
- Part-time jobs often don’t come with set schedules, so adjust your expectations accordingly.For example, you might be filling in gaps in coverage or helping out when the business has overflow work.
Freelance or consult.Consulting is a good way to continue to use your professional expertise but on a schedule that works for you. When you consult, you can pick and choose the clients you want to work with. You’ll also work only when you want to.
- Tell your current employer that you’ll be available for consulting work once you retire. Since they know your reputation, they can be a good source of consulting.
- Also talk to hiring managers at your competitor firms. Send an email or talk over the phone. Tell them you are consulting in your retirement.
- You should also consider other industries where your skills might be valuable. For example, you could have had a career writing advertising copy for financial firms. You can transfer these skills to writing copy for other businesses.
Start your own business.If you have a great idea for a new business, this is the perfect time to start it. Since you can use your retirement savings to cover your cost of living, you do not need to rely on the business for your income--rather you can follow your passion or hobby.
Determining How Much You’ll Need
Add up your basic living expenses.Your investment decisions will be driven by how much income you need for retirement. For example, you’ll want to cover as many basic living expenses with predictable income, so calculate how much you need to pay the bills.Calculate the following:
- housing costs
- monthly utilities (heat, electricity, gas, water, phone, etc.)
- insurance, including health insurance
- food and clothing
- any debts you’ll have to pay
Use a calculator.Many calculators are available online that you can use to get an estimate of how much you’ll need for retirement. You can find them online by typing “retirement calculator” and searching through the results.
- The typical calculator will ask for your current age and retirement age. Plug in the amount you have saved and your current income.
- These calculators make different assumptions which may not be correct. For example, they might assume you only need a certain percentage of your current income to live on.
- However, calculators are a good rough guide. For more precise calculations, you should meet with your financial advisor.
Estimate how much you want.You might want an amount more than is necessary to pay your bills. In that case, estimate how much you want. For example, you might want to use your retirement to travel or start a small business.
- Add this amount to your basic living expenses. If you intend to do a lot of travelling, then you’ll need to make much more than your basic living expenses.
Meet with a financial advisor.Your advisor is your key source of information and advice. If you have an employee-sponsored retirement plan, then there should be financial advisors you can meet with. Call your plan administrator and ask. If you don’t have an advisor, then get referrals from family and friends or another professional, like an accountant. Talk about the following with your advisor:
- Your financial goals for retirement. It’s easier to come up with an investment strategy if you know your goals.By knowing your goal, your advisor can figure out the rate of return you will need.
- How long your retirement might last. People are living longer and longer. As of 2010, the average retirement was 25 years.
- Whether you should consolidate your savings to make the withdrawal process easier.
- Your tolerance for risk. You should come up with an investment strategy you are comfortable with. You also shouldn’t plan on being riskier than you need to be in order to reach your investment goals.
Talk with other professionals.There are tax considerations involved with each investment decision. You want to fully understand those consequences before investing or withdrawing from an investment.
- Find an accountant or other tax professional and schedule an appointment. You can find an accountant by looking in the phone book or by asking someone you know. You can also find a certified public accountant by obtaining a referral from your state’s Society of Certified Public Accountants.
- Also meet with an estate attorney. If you want to reduce your tax obligation in retirement, then you may need to shelter assets in a trust or other vehicle. You’ll want a lawyer to describe your options to you and draw up the legal documents.
- If you don’t have an estate attorney, then you can find one by contacting your state or local bar association.Ask for a referral.
Video: How to Generate a Comfortable Retirement Income | S. 1 Ep. 20
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