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Even if you've carefully laid out a financial plan for retirement, taxes, rising health care costs and unpredictable returns on investments are all factors that could potentially throw off your plan. However, if you find yourself in this situation, you likely have some options for generating income in retirement. Here are five strategies you may want to consider.
1. Delay Social Security Income
The earliest you can receive a reduced Social Security retirement benefit is age 62, and the earliest you can receive your full retirement benefit is at your full retirement age, which depends on the year you were born, according to the Social Security Administration (SSA). But that doesn't necessarily mean your full retirement age is the best time for you to start collecting. Delaying your Social Security retirement benefits could be one way to generate more income in retirement.
If you wait until after your full retirement age to start collecting, your monthly retirement benefit will increase. For instance, if you were born between 1943 and 1954, your full retirement age is 66. You will receive an 8% increase to your benefit for each full year after your full retirement age (66). However, if you start your benefits at age 66 and 10 months, you would only receive a 6.7% increase. These increases end at age 70, according to the SSA.
Of course, this will likely require some extra planning, as you'll need to use other sources of funding to pay your bills between now and when you eventually file for Social Security. But you have a number of potential options, including staying in the work force for a few extra years and using cash savings between ages 66 and 70.
2. Manage Your Retirement Plans Well
Your retirement plans can also be a passive income source. For instance, to take full advantage of your 401(k), individual retirement account (IRA) or any other retirement savings you may have, you'll likely want to create a smart withdrawal strategy, if available, to help minimize your taxes while keeping you invested in income-generating assets. If you're unsure what your strategy should be, consider speaking with a financial representative or a tax advisor to determine what's best for you. It's important to always remember that no investment type can guarantee growth, and may actually lose value over time.
3. Pay Less in Taxes
In addition to considering income-producing assets, you might want to shift away from funds that create bigger tax bills and look for more tax-efficient investments. Taxes get complicated, and the exact strategy you use to potentially pay less in taxes in retirement will depend on the details of your situation (including where your money is invested and what state you live in). Again, it might make sense to consult with a tax advisor who can help you create a strategy for paying as little as possible in taxes so you can use more of your savings in retirement.
4. Consider an Annuity
If you want to give your retirement income a boost, you might consider using an annuity. An annuity is a contract between you and an insurance company that allows you to contribute money to a tax-deferred account. You then receive payments either immediately or at some point in the future. Annuities can guarantee a stream of income that might help you maintain a comfortable lifestyle in retirement. However, it's important to note that annuities may be subject to certain penalties, taxes or fees.
The type of annuity that's best for you will likely depend in part on whether you're already retired or starting to save for retirement. You should also take into account your unique financial situation and needs. You may want to have a discussion with a financial representative or a tax advisor to consider what's best for you.
5. Pick Up Work That Feels Like a Hobby
Going back to work full time at a job that's not fulfilling may not be what you want to do when you're supposed to be retired. But finding a part-time position that you truly enjoy might be a good idea for generating income in retirement while also providing additional benefits, like keeping your mind sharp and giving you an easy way to interact with more people on a daily basis. So if you find that you enjoy making crafts, woodworking or freelance consulting, consider ways to monetize these skills on your own schedule.
While you may not be working full time in retirement, you can still make smart financial decisions to help keep more money in your pocket. Maximizing your retirement income with multiple sources could help you reach your financial goals and the freedom to enjoy your retirement years, but consider speaking with a financial advisor or a tax advisor before you get started.
