Many people obsess over reaching a certain retirement savings number -- $1 million is the most common target. However, the reality is that retiring comfortably isn't necessarily about how much money you have in savings; it's about how much sustainable income you have from savings, Social Security, and other sources.
With that in mind, if you're concerned about having enough income in retirement, here are six ways you could boost your retirement income or stretch your existing income even further.
1. Claim Social Security later
It's common knowledge that waiting to claim Social Security results in higher monthly checks. However, many people don't realize just how much of a difference it makes.
Here are the three rules that determine how much your Social Security benefit is adjusted based on your claiming age:
- Your benefit will be reduced by 6 2/3% for each year you claim before reaching full retirement age, up to a maximum of 36 months early.
- Beyond 36 months, your benefit will be reduced at a rate of 5% for each year before full retirement age, as early as age 62.
- If you choose to wait beyond full retirement age, your benefit will be increased by 8% for each year you wait.
These rules are all applied on a monthly basis. For example, if you wait one month past full retirement age to claim Social Security, your benefit will be increased by 0.67%.
Here's the point: If you turn 62 in 2018, your full retirement age is 66 years and four months. The difference between claiming at 62 and waiting until your full retirement age is a monthly Social Security benefit that's 36% higher. Waiting until 70 will produce a 76% higher monthly check than you'd be entitled to at 62. This can make a big difference in your financial security in retirement.
2. Allocate your 401(k) properly -- before and after retirement
Many people allocate too little of their portfolio to stocks or avoid them entirely. While it's certainly true that stocks are riskier than bonds or cash over short periods of time, they offer much more potential for long-term growth, which is essential for keeping up with inflation and growing your portfolio (and income stream) after you retire.
As a general asset allocation rule of thumb, you can subtract your age from 110 to determine the percent of your portfolio that should be invested in stocks, with the remainder in bonds. For example, if you're 45, this implies that you should keep about 65% of your assets in stock-based investments, with the other 35% in bonds. If you're a 70-year-old retiree, a 40% stock/60% bond mix would be more appropriate. And you may be surprised at how effective that 40% stock allocation is at helping you keep up with inflation, without adding too much to your overall portfolio volatility.
3. Max out your HSA
According to Bank of America Merrill Lynch's 2017 Workplace Benefits Report, 79% of employees experienced an increase in healthcare costs last year, and just 11% say they know the best way to cover healthcare costs in retirement.
While there's no easy solution to keeping healthcare costs in check, a Health Savings Account, or HSA, can maximize your savings.
HSAs are available to people who have high-deductible health plans, which the IRS defines as $1,350 (single coverage)/$2,700 (family coverage) for 2018. Money is contributed on a pre-tax basis up to the IRS annual limits, similar to a 401(k) or traditional IRA, and is then invested in funds or other choices offered by your HSA provider. Unlike a flexible spending account (FSA), HSA funds can accumulate from year to year.
Any HSA funds used to pay for qualified healthcare expenses can be withdrawn tax-free, no matter how much your investments have grown. In other words, an HSA is the only type of investment account that has a double tax advantage in this way. So, if you contribute to an HSA now and let the funds build until you retire, you can withdraw them tax-free to cover your out-of-pocket healthcare expenses. This doesn't directly increase your retirement income, but it can definitely help free up some of your money that would otherwise be spent on healthcare.
4. Consider a reverse mortgage
A reverse mortgage is the exact opposite of a traditional mortgage. Instead of making monthly payments to a bank and building equity in your house, the bank pays you a monthly (or lump sum) amount in exchange for equity in your home.
To be perfectly clear, a reverse mortgage isn't right for everybody. First off, they're expensive. Fees, closing costs, and mortgage insurance on a $100,000 reverse mortgage can add up to more than $10,000. And you lose equity in your home over time.
However, if the pros outweigh the cons, a reverse mortgage can create a nice stream of monthly income to supplement your Social Security income and retirement savings. And you never have to pay back the loan unless you sell your home. After you die, the bank will sell your home to get paid.
5. Work a little -- or a lot -- after you retire
There are tons of options for senior citizens who want to work a part-time job, and that's especially true today. Not only are the traditional options available, but the new "gig" economy has opened up all sorts of interesting options for seniors looking to make additional money.
For example, a 65-year-old friend of mine drives for Uber a few evenings each week, and the average Uber driver earns $15.73 per hour before vehicle expenses, according to one recent study. Or you could deliver groceries for Shipt, which the company claims pays $15-$25 per hour. These are just a couple of the options out there, and the best part for retirees is that you can work as much, or as little, as you want.
6. Pay off your debts before you retire
Many retirees just think of ways to increase their cash flow in retirement. However, it's important to realize that reducing your expenses achieves essentially the same thing.
For this reason, one of the smartest ways to increase your retirement "income" is to pay off as many of your debts as you can before you retire. Let's say that you expect a $5,000 monthly income in retirement between Social Security and income from your savings, and you currently pay a $1,500 mortgage, a $400 car payment, and $200 per month for a personal loan. This leaves you with $2,900 in additional income to cover living expenses.
On the other hand, if you pay off your mortgage and loans before you retire, you can use that entire $5,000 for living expenses -- effectively a 72% raise.
So, it could be smart to make a plan to tackle your debts before you retire, or at least accelerate repayment, especially when it comes to your mortgage. Retiring without a mortgage versus retiring with one can make a big difference in your financial security.
A couple of these could dramatically boost your quality of life
To be clear, not all of these are for everyone. I already mentioned the downsides to a reverse mortgage, for example. In addition, not every retiree is able to work, and paying off a mortgage in full may not be a practical pre-retirement goal if you bought your house in your 50s.
The point is that by implementing just one or two of these, you could dramatically increase your retirement income or maximize your existing income stream. You may be surprised at how much of a difference a few hundred dollars per month can make in your financial comfort.