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Saving for retirement is one of the biggest challenges we face in life. According to the St. Louis Federal Reserve, the current personal household savings rate of 5.7% is half of what it was 50 years ago, and it's markedly lower than most developed countries. Making matters even dicier is that we're living longer than ever, which is straining the nest eggs of retirees. Seniors, in many cases, need to be able to do more with less; but what that "more" is isn't always clear.
With this in mind, we asked three of our Foolish contributors for their suggestions on one action retirees could take to increase their income during their golden years. Here are the unique ideas they came up with.
Make the most of your pension
Dan Caplinger: Fewer jobs have traditional pension plans now than in the past, but there are still some employers that offer pensions. If you're fortunate enough to be eligible to receive pension payments, it's essential to know the rules so you can make the most of them.
Most pensions offer rising payments depending on how long you've worked for your employer. In many cases, your pension is based on your salary toward the end of your career, with employers taking your average pay over the last several years before you retire. In general, the more tenure you have with your employer, the higher the percentage of your benchmark pay you'll receive.
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In particular, there are two key things to know about your pension. First, if your pension offers a significant bump in pay if you reach a certain milestone, then you should strongly consider working long enough to earn the pay raise. For example, retiring after hitting the 20-year mark could pay you a surprisingly large amount more than retiring at 19 years. Second, if your pension offers you a lump sum, you need to assess how much you'll receive versus what your monthly payments would be, how you'd invest the lump sum if you took it, and the value to you of the longevity insurance that monthly pension payments provide. Balancing those factors will help you maximize your retirement income from a pension.
Tap the equity in your home
Jason Hall: One of the biggest sources of cash for many retirees is their home equity, and there are more than one way you can utilize the value of your home to help make ends meet.
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One common way is by downsizing. Chances are, the house you retired in could be the same home you raised a family in, and frankly, it's probably a lot more house than you need. By selling your big house and buying a smaller, less expensive one, you'll be able to put the leftover equity to work for you in several ways, including Sean's suggestion of buying high-quality dividend stocks if you're able to hold them for the long-term. If you'll be more likely to need to tap that equity sooner, high-quality municipal bonds may be a better choice, with less likelihood of short-term losses.
What if you don't want to move? Consider a reverse mortgage. You'll be able to tap your equity for many expenses while staying in your home, and won't have to make payments on the reverse mortgage during your life, unless you decide to sell the house.
Unfortunately, the percentage of retirees who own their home is in decline, while more of those who do own still have a mortgage in retirement. If you're in this boat, you'll have fewer sources of money when you retire.
Use dividends to your advantage in a low-rate environment
Sean Williams: With interest rates exceptionally low compared to historical standards, putting money into interest-based assets such as bank CDs, savings accounts, or Treasury bonds will likely result in real money losses relative to the national inflation rate. Instead, I'd encourage pre-retirees and retirees to open an income portfolio to increase their income during retirement.
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Dividend stocks serve a number of purposes for investors, including hedging against the inevitable downturns that the stock market goes through from time to time. However, dividend payments also act as a beacon for companies whose business models have stood the test of time. Yields on select dividend stocks can also be substantially higher than the current yields you'll find with CDs and bonds, leading to the creation of real wealth that you could reinvest or use to cover your month-to-month expenses.
What stocks should pre-retirees and retirees consider? On an individual basis, the Dividend Aristocrats aren't a bad place to start. To be included as a Dividend Aristocrat -- a distinction only around 50 companies currently have -- a company has to have raised its annual payout for 25 consecutive years, or more. A good example is healthcare conglomerate Johnson & Johnson (JNJ -1.26%) which has increased its payout in 54 straight years. More importantly, most of J&J's operations, especially its pharmaceuticals business, is inelastic since people can't choose when they get sick or what illness they contract. This means J&J is mostly recession-proof, which makes its 2.7% dividend yield look all the more attractive.
For retirees with less of a stomach for risk, an electronic-traded fund (ETF) might be a better choice. Though ETFs have management expenses attached, they can provide the diversity seniors may be looking for. The Vanguard High Dividend Yield ETF (VYM -0.47%) is an ETF worth checking out with a 3% yield, a minuscule 0.09% annual expense ratio, and 421 included stocks owned within the fund.
