Finances are a source of anxiety for many people, and especially for retirees, who are often living on a fixed income without any real idea of how long their nest egg has to last. You can reduce that stress by planning carefully and seeking out opportunities to boost your income in retirement. Here are four strategies that are proven to work.
1. Save as much as you can before retirement.
Okay, so this tip isn't very useful if you're already in retirement, but it bears mentioning anyway because it's the simplest way to increase your retirement nest egg. You can save up to $19,000 in a 401(k) in 2019 and $6,000 in an IRA. Adults 50 and older may contribute up to $25,000 to a 401(k) and $7,000 to an IRA. If you got a late start on retirement saving, taking advantage of these catch-up contributions can help you get back on track for your retirement goals. Don't forget to go after any employer 401(k) matches, too.
Think carefully about the type of retirement account you're using, as this will affect how much you lose in taxes. You pay taxes on Roth 401(k) and IRA contributions in the year you make them, but you don't pay taxes on distributions in retirement. Traditional IRA and 401(k) contributions reduce your taxable income for that year, but then you pay taxes on your retirement distributions. Roth accounts make the most sense if you believe you're in the same or a lower tax bracket today than you will be in retirement, while tax-deferred accounts make more sense if you think you're in a higher tax bracket today than you will be when you retire.
2. Delay Social Security benefits.
The age you begin Social Security matters. If you want your full scheduled benefit per check, you must wait until your full retirement age. This is 66 or 67, depending on the year you were born. You can start as early as 62, though the Social Security Administration gives you less per check to account for the extra months you're receiving benefits. If you start at 62, you'll only receive 70% of your scheduled benefit per check if your full retirement age is 67, or 75% if your full retirement age is 66.
You can also delay benefits past your full retirement age and your checks will increase until they reach the maximum benefit at 70. This is 124% of your scheduled benefit if your full retirement age is 67, or 132% if your full retirement age is 66.
If you can afford to delay Social Security benefits until your full retirement age or 70, you'll probably get more benefits in the long run, unless you don't expect to live a long life. In that case, you're better off starting benefits early and getting as much as you can from Social Security before you die. You can estimate your Social Security benefit at different ages by creating a my Social Security account. Multiply these monthly amounts by 12 to get your estimated annual benefit, and multiply this by the number of years you expect to claim benefits to determine your average lifetime benefit and see which starting age offers you the most money overall.
3. Consider a part-time job in retirement.
If you grow bored in retirement, you might consider taking on a part-time job. This is also a good strategy if your retirement savings aren't enough to cover all of your expenses. You could seek out a new job, or check with your current employer to see if the company will allow you to phase into retirement by working part-time for a few years, gradually reducing your hours until you're fully retired.
Apart from the extra income, working part-time in retirement may enable you to delay required minimum distributions (RMDs) from your retirement account with your current employer. The government forces you to begin taking these withdrawals from all retirement accounts, except Roth IRAs, at 70 1/2 so it can get its cut of your savings. RMDs could force you to withdraw more than you want in retirement, raising your tax bill. You can calculate what yours might be by dividing your total account balance by the distribution period next to your age in this worksheet.
If you keep working past 70 1/2, you can delay RMDs until you retire, but this only works for retirement accounts you have with your current employer. While you're working you can withdraw money from your retirement accounts at your own pace, which will lower your overall account balance -- reducing your RMDs when you do begin taking them.
4. Seek out sources of passive income.
If you're considering downsizing in retirement, think about renting out your current home instead of selling it. The tenants will pay you each month, and if the house is already paid off that's all extra money in your pocket. But running rental properties isn't for everyone: When something breaks, you're responsible for fixing it, so you need a well-stocked emergency fund that can cover the costs of your homeowners deductible and major home or appliance repairs. Try to set aside three to six months of living expenses to be safe.
You could also consider investing in dividend stocks. These stocks periodically pay you a cash dividend. The amount you'll receive depends on how much of the stock you own and how the company has been performing lately. If you reinvest those dividends, you'll begin earning interest on your interest. This is called compound interest, and it's the main reason investing is such a powerful way to grow your money. If you're not sure how to invest your money correctly, consider speaking to a financial adviser who can help you determine your best move.
Retiring doesn't mean you're done earning money forever. If you employ a few of the strategies above, you can continue generating income in retirement, and this can do a lot to ease the burden on your personal savings.