How to increase your retirement income when social security only covers 40%
Most retirees rely on Social Security to cover their expenses, but that might not be enough to meet your desired lifestyle. Your Social Security benefit depends on a number of factors, but the average benefit is around $ 1,500 per month. The maximum that can be received is around $ 3,900, and this requires a high income career and waiting up to age 70 to start receiving payments.
If you want to afford the retirement lifestyle you’ve been dreaming of, or if you just want to avoid worrying about health expenses, you will likely need to find other sources of cash. The best strategies depend on your age and personal circumstances, but there are a handful of things you should consider to increase your retirement income.
Build up retirement assets if you have the time
If you have a few years left before you retire, there is an opportunity to save your income and invest those savings for growth. The assets that you have accumulated over the years can be invested to generate dividends and interest, which provide monthly and quarterly cash flow. You are also free to spend with your accumulated savings.
Making the most of your 401 (k) match is a great place to start if there is one available. Many employers offer this type of benefit, in which they make contributions to your retirement account in proportion to your own contributions, up to a certain amount. It’s free money that goes into an investment account with every paycheque, and it adds up over time.
You may also want to consider some of the tax benefits that might be available through traditional and Roth IRA accounts. Contributions to traditional IRAs are tax deductible, allowing you to save and invest tax-deferred. You will have to pay taxes on IRA withdrawals at retirement, however, take this into consideration. Roth IRAs don’t offer any tax deductions up front, but eligible withdrawals at retirement are tax-free, which means you’ll save on capital gains tax as your accounts grow.
For savers who start late, the IRS allows catch-up contributions to retirement accounts. People aged 50 and over can contribute an additional $ 6,500 to their 401 (k) and $ 1,000 to an IRA. This pushes the annual contribution limits to $ 26,000 for your 401 (k) and $ 7,000 for an IRA.
Develop an income investment strategy
If you are already retired and have accumulated savings, you can leverage those investments to generate income. Most retirees have a balanced portfolio of stocks and bonds, which allows for growth without excessive volatility. If you have obligations, they are already of interest to you. A diversified bond portfolio is a great tool for relatively low risky returns, even if bond returns aren’t very high right now. If you want extra income today, you can choose to regularly distribute that interest to your bank account rather than reinvesting it.
Dividend stocks are another important piece of the retirement income puzzle. Retirees can benefit from investing in stable, dividend-paying companies with broad economic moats and strong balance sheets. Many dividend aristocrats fit this description, and these types of stocks produce reliable income for shareholders every quarter. In retirement, it’s money you can use for whatever purpose you choose.
Other financial products can also help increase income. High yield savings accounts offer better rates than checking accounts or savings accounts that do not prioritize interest rates. If you keep a lot of cash in the bank, high yield products will generate more cash in your savings.
Retirees who want a guaranteed income can also consider purchasing an annuity contract. These are financial products offered by insurance companies that pay a fixed amount of periodic income, depending on the policyholder’s contribution to the contract. Many annuities come with high fees and can remove flexibility from your overall financial plan, so be sure to consider the pros and cons before using any of these instruments.
Minimize taxes on withdrawals
Finally, if you are retired, it is important to minimize taxes on the income you earn from your investments. This helps you get the most out of your savings.
You might have the option of choosing from active brokerage accounts, a 401 (k) or IRA. Withdrawals of all of these products are taxed differently, so be aware of that. If you are making larger than average withdrawals a year to pay for vacation or medical bills, it would be wise to source this money from a Roth IRA or brokerage account, as they are not subject to income tax. Roth withdrawals are generally not taxed, while regular brokerage withdrawals result in capital gains only when you sell investments to get money, and only on the appreciated part.
Meanwhile, years with low withdrawal or expense totals could be good times to tap into your traditional 401 (k) or IRA. A low tax bracket means you’ll cede less of your savings to the government and be able to keep more tax-efficient accounts on hand for years when you could upgrade.
The best moves depend on your personal situation and it’s always impossible to know what the future holds. However, having a tax-sensitive distribution strategy can still make a big difference to your retirement cash flow.