According to a Prudential survey, more than seven out of 10 Americans are concerned about outlasting their income during retirement. Most baby boomers planning to retire during the next 20 years will need a combination of post-retirement work, Social Security distributions, and smart portfolio management. (We here at David Ortiz Advisors specialize in using all of these tools to help you create a dependable retirement income to fit your needs) Consider implementing the following steps in order to maximize your post-retirement income, and remain financially independent during your golden years:
1. Continue Working. Delaying retirement as long as possible makes sense. Gallup has reported that nearly three-quarters of U.S. workers plan to work beyond their retirement age – 40% by choice and 35% out of necessity. The economic and psychological benefits of doing so include:
- Greater Financial Security During Retirement. For most workers, their last few years of work are top earning years. However, since most of life’s major expenses – such as putting kids through college or buying a home – are typically over, a much higher percentage of income may be dedicated to savings.
- Improved Physical and Mental Health. Numerous studies have indicated that people who continue working live longer and enjoy greater health than those who retire at 65 or younger. The number of hours worked don’t seem to matter, but retirees who find work related to their previous careers reap the greatest mental health benefits. Unless your work is simply too stressful or physically demanding to continue, consider extending your employment out as long as possible.
2. Delay Social Security Benefits. Here’s what you need to know to get the most out of Social Security:
- You’re eligible to begin receiving payments once you’ve reached age 62, but your payments will be permanently reduced if you start taking them prior to retirement age – unless those benefits are recaptured due to the level of your earned income. Your full retirement age is determined by your birth date, and your benefit reduction is based upon the number of months between your start date and full retirement age.
- If your spouse is at least 62 years of age, he will be entitled to receive either his own benefit or half of your benefit – whichever is higher. This payment will be permanently reduced, however, if distributions start prior to his full retirement age. Upon your death, your surviving spouse’s benefit is increased to 100% of the monthly payment amount you’ve been receiving. A spouse cannot receive more than one Social Security benefit at a time.
- If you start receiving payments from Social Security prior to your full retirement age, these distributions will be reduced by $1 for every $2 you earn above $15,120. If, for instance, you elect to begin receiving benefits of $14,400 per year at age 62 – and have employment income in excess of $43,920 – your Social Security payments will be reduced accordingly. In this event, you’ll receive credit for the recovered payments, as well as an increased monthly benefit when your earned income drops below the exempt amount or you reach full retirement age. If payments instead begin the year you reach full retirement age, your benefit will be reduced $1 for every $3 earned for that year alone. No penalty applies for earned income during the years following your full retirement age.
- Delaying Social Security payments after you’ve reached full retirement age will result in an increase of two-thirds of 1% for each month you postpone payments until you reach age 70. Delaying your payments beyond 70 years of age won’t increase your monthly benefit.
- Depending on your income level, a portion of your Social Security benefits will be taxable above a total income of $25,000 for singles and $32,000 for married couples. Anticipated taxes may be withheld from each payment, or quarterly tax estimated payments can be made.
Generally speaking, delaying Social Security payments until you’ve reached full retirement age will yield the greatest financial benefit. There are exceptions, however. For instance, Gary and Jill are married and they both have an employment history. At 66 years of age, Gary continues to work. Jill recently retired with a Social Security benefit of $800 per month – less than she would receive as a spousal benefit. Gary decides to defer retirement until age 70, so Jill can receive the $800 in her own name until he retires in four years. His estimated payment at that time will be $2,940, while Jill’s payment would increase to $1,470 by forfeiting her own benefit in favor of the spousal benefit.
3. Reduce Volatility
Once you begin drawing down your nest egg in order to finance retirement, it’s important that you mitigate the investment risk of your portfolio. You can do so by lowering the portfolio’s equity allocation to below 50%. Conservatively balanced portfolios have historically consisted of 60% bonds and cash equivalents – with the remaining 40% invested in a diversified group of large-cap, small-cap, and international stocks. Due to years of low interest rates, bond prices are generally up. However, interest rates are expected to remain level or increase over the next decade as governments worldwide continue to grow the supply of debt securities. Instead of investing new capital solely into bonds that will likely decline in value, consider staying short-term in cash equivalents or managed bond funds as a diversification alternative.
4. Secure Your Retirement Income
Creating a steady income is of paramount importance during your golden years. Consider diversifying your income-generating investments beyond the traditional bonds and dividend-paying stocks. Adding real estate investment trusts (REITs) and master limited partnerships (MLPs) with investments in energy assets to your portfolio can further stabilize your yields. Income can increase each year, offering a hedge against inflation. These investments also offer tax advantages, since a portion of the payments is considered return of capital, and is therefore not taxable. REITs typically provide high dividends, which are secured by stable rents from long-term leases. Shares are bought and sold on a stock exchange, making them an easy and liquid investment. Most MLPs tend to be very stable, produce consistent cash flows each year, and offer very attractive yields. Some analysts argue that MLPs have historically outperformed fixed income investments during periods of rising interest rates, making them a viable investment alternative over the next decade.
The average 65-year old retiree is expected to live at least another 20 years. Prudent management of your income will allow you to remain productive, enjoying everything a well-planned retirement has to offer. (Don’t wonder how you’re going to be able to enjoy the retirement that you have always wanted, that’s not what you worked your whole life for. Call me now and we can figure out a unique solution for your unique situation. We don’t sell products we find solutions.)
Topics: Retirement Income, Income in Retirement, Retirement Savings into Income