Retirement Income Strategy

Ways to generate income in retirement

Bucket Strategy

We believe one of the best ways to invest for retirement income is the bucket strategy. This approach takes your retirement income and distributes it into three buckets that are dependent on the timeframe you’ll need access to the funds. The objective is to create a balance of investment growth with accessibility to your funds. The first bucket is what is used for emergency funds and any money that will be needed within the next few years for major expenses. The money in this bucket should be kept liquid in a high-yield savings account so that you can quickly get to it regardless of changing market patterns.

Bucket two is reserved for money you plan to use anytime in the next three to ten years. This money should be placed in more secure investments like certificates of deposit (CDs), bonds, or fixed annuities. You can also use the funds in this bucket to replace any money you may have to use from your first bucket.

The third and final bucket is used for funds that you do not foresee using for at least ten years or more. This money could be put in stocks and assets that strives to create the greatest growth potential in order to produce the best retirement income streams. In addition, it’s wise to periodically sell some of these funds and redistribute them into more secure investments within your second bucket.

Systematic withdrawals

The systematic withdrawal strategy takes a specific percentage of your nest egg during the first year of retirement and steadily increases the amount every year to counter inflation. One way to do it is the 4% rule, which means that you limit annual withdraws to 4% of your nest egg.

While this approach can be effective, it also creates assumptions on investment performance and the length of time your retirement will last – both of which vary from person to person. In this case, reducing or increasing your withdrawal rate based on your investment’s performance may be more practical. The 4% rule can be used to help you get started, but it’s best to look into various options before deciding on the withdrawal rate that is right for you.

Annuities

An annuity is an agreement made with an insurance company stating that you will pay them a specific amount of money, and in return, the company will supply you with monthly checks for the duration of your life.

There are different types of annuities, including immediate – you provide the insurance company with one large payment and they begin sending you monthly checks immediately, and deferred annuities – you regularly make payments to the company but do not receive checks for several years.

The good thing about annuities is that they are retirement income generators – you’re guaranteed a source of income in addition to Social Security, but they aren’t right for everyone. Some annuities can come with high fees and they may not offer as large of a return as other investments. They can also be challenging to get out of if you decide you want to. The best thing to do is look at all the factors before deciding if an annuity is right for you.

Maximizing Social Security

Social Security is another option for how to generate income in retirement. It’s a guaranteed source of income, but the amount you receive is dependent on the income you made during the years you worked and the age you chose to begin claiming benefits. To receive the full amount you’re entitled to, you must wait to start your benefits until the full retirement age (FRA) of 66 or 67.

If you start early, your per-check benefit will be reduced. For example, if you start at age 62, you’ll only receive 70% of your benefit per check if your FRA is 67, and only 75% if your FRA is 66. Conversely, choosing to delay your benefits can mean a larger amount of money over your lifetime, depending on how long you live. Delaying benefits could also make you eligible for 124% of your benefits per check at age 70 if your FRA is 67, or 132% if your FRA is 66.

Earning money in retirement

Another great retirement income generator is to continue working part-time to provide yourself with additional funds. This is a good option if you’re concerned about running low on money; it also alleviates potential boredom that can occur during retirement. However, if you don’t want to work, you could always look into other options to make an income, like purchasing a property to rent out or
investing in a business.

It’s important to remember that you will still owe taxes on these streams of income, and if you don’t have a regular paycheck, it will be up to you to remember to set aside the funds that are needed. To do this, consider setting up a savings account dedicated to storing money for taxes so you don’t spend it.

Tax efficiency

The different types of savings are taxed in various ways, and understanding the various ways is crucial to being able to keep more of your money. Regular income taxes are required on your tax-deferred retirement distributions but are not required on your Roth IRA and Roth 401(k) as long as the account is at least five years old and you are 59 1/2 years of age or older. However, if you have funds in a taxable brokerage account, depending on your income, you may owe long-term capital gains taxes on your money.

It’s possible to reduce your taxes by remaining aware of your tax bracket and depending more on Roth savings when you’re close to the top of your bracket. If you experience a lower income one year, consider doing a Roth conversion to switch parts of your tax-deferred savings into Roth savings so you can avoid owing on those distributions in the future. You also need to be aware of required minimum distributions (RMDs) once you reach 72, as you could pay a penalty for not withdrawing enough annually.

Health savings account

A Health savings account (HSA) is mainly used to cover medical expenses, but can also be used for non-medical expenses when need be. Until you reach the age of 65, you’ll pay a penalty. However, once you reach age 65, you can utilize the funds in the same way you would a traditional IRA with regular taxes on withdrawals, as well as tax-free medical withdrawals and no RMDs.

To contribute to an HSA, you must have a high-deductible health insurance plan, one with at least $1,400 for an individual or $2,800 or more for a family in 2020 and 2021. For 2020, an individual may contribute up to $3,550, while a family may contribute up to $7,100. The limits rise in 2021 to $3,600 and $7,200.

Downsizing

Downsizing is a great way to extend your savings. While this is based on personal choice, moving into a smaller house or to an area that is more affordable can help reduce financial strain. However, if you choose not to downsize, you could also rent out additional space to help balance some of your living expenses.

While every option on this list may not be your best investment for retirement income, implementing some of them into your financial plan can help stretch your savings and make it easier to adjust to retirement.

Annuities are intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index. Guarantees are subject to the claims paying ability of the issuing insurance company.

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