“How can I stretch my retirement savings?” This is one of the common questions in the minds of most people, especially when they are approaching retirement.
There is little you can do about inflation, interest rates, and Social Security. But saving money and investing your savings are among the things you can control to provide a secured financial future.
In addition to these, here are some retirement income strategies that can produce cash flow to cover your daily living expenses. These income strategies will reduce the chances of outliving your retirement savings.
Use the Bucket Strategy to Bucket Your Money
Investing for the long-term with the goal of growing your funds is a great idea. But you need to protect some of your money for short-term use, especially for IRAs or 401k funds that don’t provide guaranteed income.
This is where the bucket strategy comes into play. It basically means dividing your money into different investment categories based on when you will need it. The goal is to have access to funds in retirement without disrupting the growth of your long-term investments.
The exact details will differ between individuals based on their needs and preferences, but a typical bucket strategy consists of splitting your money into three buckets.
The First Bucket
Think about your living expenses for the next three years. Add to that any major purchases you plan to make within the next couple of years. Lastly, set aside some money for emergencies. All of these go into the first bucket.
But what exactly is the first bucket?
It is any high-yield savings account, bonds, or cash. The money you put in this bucket is not likely to see any huge gains, but it is protected against the ups and downs of the market, thanks to the stability of the funds.
The important thing to keep in mind is that the first bucket funds need to be kept liquid. This will make it easy for you to access them when the need arises.
The Second Bucket
The second bucket holds funds that you want to invest for the next three to 10 years. Put these funds in investment vehicles, such as certificates of deposits (CDs), bonds, and other safer investments.
The funds in the second bucket will likely see moderate growth, and you can take money out of it to replenish the first bucket.
The Third Bucket
Lastly, put money that you don’t plan to use for 10 years or more in the third bucket. This bucket is usually stocks and other long-term, high-growth investments.
It is a good practice to periodically sell some of the assets in the third bucket and put the proceeds in the second bucket since it contains safer investments.
Using a bucket strategy is a great way to ensure that you have enough money to cover your living expenses, even during a recession without touching your long-term investments. It is also a good strategy for leaving your long-term investment alone, even when the market is taking a nosedive, instead of rushing to pull out your money.
Systematic withdrawal is another strategy you can employ to ensure that you don’t run out of money in retirement while maintaining a healthy account balance.
With this approach, you will withdraw a certain percentage from your retirement account and slightly increase the amount each year to cushion the effect of inflation. A general rule of thumb is to withdraw only 4% of the interest and dividends accruing on your investment. This will allow your account to keep generating gains through retirement.
The 4% rule is simple to follow and provides a fairly stable income stream. However, it doesn’t work in every situation.
For example, your withdrawal rate might reduce significantly if your investment doesn’t perform well for a particular year. On the other hand, you may get good returns if your investment is performing well.
In any case, the systematic withdrawal approach using the 4% rule is a good starting point and can be a predictable income stream, but it is best to combine it with other retirement income strategies.
Predictable Income from Annuities
Buying an annuity is one of the retirement income strategies that guarantee cash flow for life or whatever period you choose.
Purchasing an annuity adds an element of predictability to your income when you retire because it is a contract between you and an insurance company that agrees to make periodic payments to you in exchange for a one-time insurance purchase or a series of purchase payments over a specified period.
Annuities offer the following advantages:
Unlimited contributions: With variable annuities, there is generally no limit to the money you can contribute.
Lifetime income: Higher chances of generating a predictable income stream for the rest of your life, so you won’t outlive your retirement savings.
Cost of living adjustment: You can use additional assets to purchase the cost of living adjustment (COLA) feature. This will potentially increase your yearly payment to take care of inflation.
Tax-deferred growth: The earnings generated on your annuity investment will not be taxed until you start receiving periodic payments or make withdrawals.
Mandatory withdrawals are not applicable: Unlike traditional IRAs, it is not compulsory to take required minimum distributions (RMDs) from your annuity investment at the age of 72.
Death benefits: If you pass on before converting a variable annuity into periodic income payments, your contributions are not lost. Your beneficiary will receive at least the amount you have contributed before you passed on.
Annuities come with either deferred or immediate classification, which simply specifies when your annuity payment will start.
Deferred annuity lets you make payments to the insurance company but your periodic annuity payments will start sometime in the future. On the other hand, you make a lump sum payment to the company in an immediate annuity. In exchange, you get immediate monthly checks.
It is crucial to carefully consider your income goals, risk tolerance, and payout options before choosing either of these classifications.
Also, keep in mind that there are a few different types of annuities, and they carry different risk to reward ratios.
The main types of annuities are:
This option offers the highest potential rewards but also carries the greatest risk.
Payments on variable annuities depend on how well the associated portfolio performs. That means the interest rates could lose value or increase in value if the investment dives or soars.
This is the annuity option that has the most reward predictability and least risk. It offers a guaranteed interest rate. But the interest rate will reset after a specific period.
This type of annuity has features from both variable and fixed annuities. It offers higher income potential than fixed annuities and lower risk than variable annuities, making it a great strategy for balancing risks and rewards.
The downside is higher costs and fees, compared to the fixed annuity. Plus, the interest rates are computed using complex methods.
Consider a Health Savings Account (HSA)
While HSA accounts are basically for healthcare, the savings account can be used to stash away money for nonmedical expenses in retirement.
Funds in a health savings account can be used just like a traditional IRA. Interest on your HSA account is tax-free and you will get tax deductions from your contributions.
Those who are 65 years and older will benefit from using up to 20% of their funds for non-medical expenses without a penalty. However, withdrawals for non-medical use are taxable income.
You can hold on to more of your money if you get a better insight into how the government tax different types of savings.
It is important to keep an eye on your tax bracket every year. Once you start to approach the top of your tax bracket, your best bet would be to rely on your Roth savings. You won’t pay taxes on your retirement distributions if you are 59 and half years old, and have maintained a Roth 401k or Roth IRA account for a minimum of five years.
Also, keep your required minimum distribution (RMD) in mind if you are 72 or older. You risk paying a penalty for not withdrawing enough yearly.
Make the Most of Social Security
You can create a “flooring” so to speak, by maximizing one of the sources of guaranteed income in retirement – Social Security.
While you can start receiving benefits from age 62, delaying Social Security a bit longer has proven to be one of the wisest retirement income strategies as it means you can get higher benefits.
Retirement tends to be longer than most people think. In the U.S., men who retire at age 65 can expect to live up to 18 more years on average, and 65-year-old women can live up to 20 more years on average.
Considering the above, delaying benefits can potentially reduce the risk of outliving your retirement savings and other sources of retirement income.
Usually, you need to wait until your full retirement age to get the maximum amount you are entitled to, based on your employment history. Your full retirement age varies, but it is usually 66 years and two months or 67 years, depending on when you were born.
If you start getting benefits as soon as you reach 62, your monthly benefits will reduce considerably – 29.2% reduction to be precise. But that’s not the real downside of getting Social Security early. The main disadvantage is that the decrease in your pay-check benefit is permanent.
On the flip side, if you choose to delay getting benefits your retirement benefits will increase significantly. Here is what you can expect:
Delaying benefits until you reach age 67 will increase your monthly paycheck by 108%.
Delaying benefits until your 70th birthday increases your monthly benefits by 132%.
For each year you delay receiving Social Security benefits (not more than 70 years of age), you earn delayed retirement credits for postponing benefits beyond your full retirement age. This accounts for the increase in your benefit pay-check. Interestingly, this increase is permanent.
Earn Money in Retirement
Perhaps one of the most straightforward approaches to ensuring you don’t run out of money in retirement is to take up a part-time job.
In addition to supplementing your retirement savings, working after you have officially retired can keep your mind and body active, and prevent boredom with its associated problems.
Landing a job in retirement is not difficult. But if the idea of going back to work to earn money doesn’t sit well with you, perhaps investing in a local business might be up your alley.
Venturing into real estate is another great way to earn money in retirement without actively working. You could buy and sell properties or rent them out for cash flow.
Keep in mind that investing in a local business or real estate requires sizable capital. So, they may not be suitable for everyone looking to earn money in retirement.
Reduce Your Living Expenses by Downsizing
This is a no-brainer. Your retirement savings will go further if you cut down on your living expenses.
For example, you can sell some personal belongings you no longer use, especially those that take money away from you, such as vehicles. You could move to a more affordable house or rent out your extra space to generate a little extra cash.
This strategy depends largely on personal preference. However, think about how financially sound a decision is before downsizing.
Retirement shouldn’t be a dreadful period for anyone. With proper planning and some smart decisions, you can make the transition less shocking, especially as it relates to finances.
Not all of the retirement income strategies shared here will suit everyone. However, using one or more of them can make your savings last longer in retirement.
John E Chambers is an experienced financial advice expert. Born in Chicago, he has a master's in Industrial Finance, but he has spent decades offering investment advice to businesses and individuals alike. He is the founder of RetireeWorkforce.com and wants the website to be valuable for retirement advice. In addition, he writes articles that help users jump-start their retirement plans and choose the best investment options. If not pondering over stock market statistics or reading some magazines, you can find John spending time with his family. As an early retiree, John also offers unique insights into what post-retirement life is like.