You work for 30 years. You save your money. One day you retire and live off the savings. But then the worst happens … at some point you run out of money and have to go back to work.
Unfortunately unless you’ve got a few good retirement income strategies in your back-pocket, this kind of scenario is a very real thing that could happen. And it does all the time.
But it doesn’t have to. As long as your mindful of a few key elements when it comes to how and where you save your money, you could actually put together a pretty simple retirement plan and make it so you don’t have to worry about ever not having enough money to cover your living expenses.
Here are the main two things to be mindful of:
Using Taxes and Risk to Shape Your Retirement Income Strategies:
Taxes. One of the most detrimental things you have working against you and the size of your retirement income are taxes. Taxes could easily eat away as much as a third of your income if you make the wrong moves such as selling your stocks too soon. Knowing that not all retirement income is taxed the same way and making withdrawals from the right sources could help to greatly minimize this tax burden and result in thousands of dollars saved over time.
Risk. The other thing that can greatly influence your strategy for making withdrawals for retirement income is risk. Some of your money will come from guaranteed sources. Others of it will come from sources that can fluctuate over time. Being mindful of which bucket you’re withdrawing your money from will help immensely and keep you from depleting your nest egg too rapidly.
Keeping taxes and risk in mind, here are the following retirement income strategies that I would recommend using to ensure that you get the most bang for your buck:
Strategy 1 – Guaranteed income from Pensions, Social Security, Annuities, etc.
Guaranteed income is one of the cornerstones to any retirement plan. It is by far the safest, easiest way to reliably get the money you need day-to-day for your living expenses.
The great thing about guaranteed income is that it is usually setup to continue paying you for the rest of your life. There’s little need to worry about market fluctuations or principal balances when you have continuously reoccurring income.
Fortunately there are many retirement savings plans where one could find guaranteed income:
Pension. If you worked for an employer that had a pension plan, then you should see when and how much you’re eligible to receive. Most of the time this will depend upon how many years of service you had contributed to the company and the pension’s current state of financial health.
Social Security. If you are a U.S. citizen, had taxable income for 10 or more years, and/or were married to someone who had taxable income for 10 or more years, then you probably are eligible to receive Social Security payments. Check the Social Security website to be sure.
Most Social Security payments do not start until after age 62. However be aware that you do have the right to delay these payments all the way up until age 70. The reason you’d want to do this is because the longer you wait the larger the check you’ll receive. So if you’re not hurting to receive Social Security any time soon, it might be a smart part of your strategy to delay it until the payments will peak.
Annuities. It’s not the smartest idea to have all your money in stocks. As a supplement to their equity accounts, many retirees will take some portion of their retirement savings and purchase an immediate annuity. In doing so they will not only reduce their risk of running out of money, but an annuity will also make them less dependent on economic and market conditions.
Strategy 2 – Dividends and Capital Gains:
Payments from dividend stocks and capital gains should be another one of your retirement income strategies that you can immediately take advantage of. The distributions from both are taxed at lower rates than your other retirement savings options (usually 15% vs 25%). Until you actually sell a stock you don’t pay taxes on the capital gains.
When done correctly, investing in high-quality companies that pay dividends or are value-oriented could lead to a steady stream of both dividends and capital gains. Research suggests that one of the reasons dividend stocks perform so well is because in order for the company to be able to pay it’s shareholders a dividend, it has to show profits and have earnings to distribute. Therefore as an investor that should help you to avoid more risky and speculative companies that may not have as great of health standing.
A great place to look for high quality dividend stocks are in two popular groups: The Dogs of the Dow or The Dividend Aristocrats.
In terms of retirement income, try not to withdraw anymore than the average rate of the dividends received from these stocks. That will help ensure that the principal portion of your investment will remain intact. For example, if the average dividend yield of your stocks is 3%, then limit your combined dividend and capital gains withdrawals to 3% for retirement income.
Strategy 3 – Tax-Deferred Retirement Savings:
The next piece of your income generation strategy should be to look at your retirement savings accounts where you were given an up-front tax break. These types of accounts would generally be things like a traditional 401k, 403b, or a traditional IRA.
Once you start taking withdrawals from these accounts, you’ll be taxed at regular earned income rates (about 25%). While that may be a higher tax rate, the nice thing about these accounts is that all the money you leave in them will continue to grow tax-free until you redeem it. Over the long haul if you were smart and chose low cost investments this could potentially be a lot of compounding returns.
Since most of the time these types of savings tend to rely heavily on stocks and bonds, part of your retirement income strategy should be to not remove more than 4% from your nest egg. 4% is the generally accepted safe withdrawal rate to help keep a portfolio intact for the next 30 years.
However, don’t be too stingy with your withdrawals either. After age 70-1/2 the IRS will force you to start making minimum required distributions. If you don’t, you’ll face a penalty.
Strategy 4 – Roth Accounts:
The last place you should withdraw money from for retirement income are your Roth accounts. In particular look to your Roth IRA or Roth 401k.
The reason we save these types of account for last is because you already paid taxes on the savings. So now anything you withdraw will have the luxury of being tax free. As part of a smart strategy, you’ll want to save this tax-free income opportunity for later in life when you’ll probably need it the most.
Bonus Strategy – Rental Income:
Your options for great retirement income strategies don’t have to end there. One more place you could look to deliver a steady stream of monthly revenue are rental properties. Rental properties are good because you can usually rent out a unit for a lot more than what it costs you to run it. Plus there are lots of good tax breaks that come along with the ownership and up-keep of the property. While it arguably does take some effort to purchase the right property and service the tenants, if done right it could be an asset that provides you with monthly income for years to come.
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