Author: Matthew Frankel, CFP® | September 27, 2018
There are many ways to increase your income stream in retirement
Are you worried that you won’t have enough income after you retire? Or are you already retired and struggling to make ends meet? If you’re in either situation, one or more of these 11 ways to boost your retirement income could help.
Work part-time after you retire
This is probably the most obvious way to increase your retirement income, so we’ll get it out of the way first.
Working in retirement can have a double benefit. In addition to providing additional income, working can help retirees stay active and engaged, which has been shown to have tremendous benefits to overall well-being.
The Bureau of Labor Statistics says that seniors will be the fastest-growing segment of the workforce over the next several years. By 2022, it is estimated that 32% of 65- to 74-year-olds and 11% of Americans age 75 and older will work.
Delay Social Security
Although it’s not the best move for everybody, one of the most effective ways of guaranteeing more retirement income for the rest of your life is delaying Social Security. By waiting until after your full retirement age to claim Social Security, your monthly benefit will be permanently increased by 8% per year.
Keep in mind that Social Security is inflation-protected income, as annual cost-of-living adjustments, or COLA, are given to help retirees keep up with rising prices. So, the higher your benefit is to start, the more inflation-protection you’ll have for the rest of your life.
Join the gig economy
Having a job in retirement may not sound appealing to many seniors. Maybe you don’t want to have to be somewhere at a certain time, or just want the flexibility to work more when you need extra money and less when you don’t.
Fortunately, there’s an ever-increasing number of ways retirees can earn some extra income on their terms. You could drive for a ride-sharing service such as Uber or Lyft, get paid to deliver other people’s groceries, and more.
Live somewhere that’s cheaper
We’ve all heard stories of people we know who have retired to some foreign country like Costa Rica or Belize and live like kings on their Social Security checks. And these stories may be true -- the cost of living in those places can be remarkably low. However, retiring abroad isn’t for everyone.The good news is that you may not need to go as far as you think to save some money. For example, New Jersey’s median home value is $316,400 and the average property tax bill is $7,601 per year. On the other hand, in neighboring Delaware -- a short drive from many parts of New Jersey -- the median home value is $83,300 less and the median property tax bill is only $1,274 -- a massive savings of more than $6,200 per year. A change like this could make a tremendous difference in how much of your retirement income you get to keep.
Max out your 401(k) and other retirement savings before you stop working
Did you know that you’re allowed to put extra money into your tax-advantaged retirement accounts in the years leading up to your retirement?
Specifically, 401(k)s, IRAs, and other retirement plans generally allow for catch-up contributions after the account owner turns 50.
With an IRA, there’s a $1,000 annual catch-up provision. So, instead of maxing out your IRA at $5,500 for 2018, you could contribute $6,500. 401(k) catch-ups are much more generous at $6,000, bringing the 2018 elective deferral maximum to $24,500.
These catch-up contributions could have a pretty big effect on your retirement savings. Even an additional $1,000 per year starting when you’re 50 could mean more than $25,000 in extra retirement savings by the time you turn 65, based on 7% annualized returns.
Stay invested in stocks, but prioritize dividends
While it’s a smart idea to gradually shift more of your investments away from stocks and into fixed-income as you get older, it’s never a good idea to get out of stocks entirely. As a general rule, I suggest subtracting your age from 110 to find your ideal percentage allocation to stocks.
One smart way to boost your retirement income, both now and in the future, is to focus on high-quality dividend growth stocks. Not only is it possible to find great dividend stocks with yields rivaling those of your bonds, but these dividends have the potential to grow over time and help your income stream grow as your retirement goes on.
You don’t need to buy individual stocks to take advantage of dividend growth -- a mutual fund or ETF like the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) can be a great way to get rising income and growth potential.
Put your emergency cash to work
Studies have shown that older workers are more likely to have a rather large emergency fund -- that is a stash of readily-accessible money that can be used to cover unexpected expenses. However, too many people make the mistake of keeping their emergency savings in an account that pays little, if any, interest.
Despite the recent string of interest rate hikes by the Federal Reserve, most banks aren’t paying significantly higher savings account interest rates yet. By doing a little research, you could find options that pay much more. For example, as I write this, Synchrony Bank (NYSE: SYF) offers 1.85% interest on its online savings accounts. If you have a $20,000 emergency fund, this translates to $370 in annual income you otherwise wouldn’t get.
Keep your full-time job a little longer
I know that I already mentioned delaying Social Security and its effects on your retirement income. However, working a little longer has a couple of other retirement income-boosting effects.
For one thing, the later years of most workers’ careers are generally among the most highly-compensated. So, not only will waiting to take Social Security result in an income boost because of delayed retirement credits, but working longer while you’re earning a relatively high income can boost the average on which your Social Security is based.
In addition, working for a few more years gives you more time to set aside money for retirement and also gives your current savings more time to grow and compound. It may not seem like much, but even one or two extra years of aggressively saving in your 401(k), IRA, or other retirement accounts can have a big impact on your retirement income.
Buy a rental property
If you’re looking to put some of your money to work, generate income, and give yourself something to help you stay active, buying a rental property (or several) could be a smart idea for you.
To be perfectly clear, owning rental property isn’t for everyone, but if you want an investment opportunity you’ll be actively involved with, are a “handy” person, and are willing to deal with a few headaches along the way (or pay a property manager to deal with them for you), rental real estate can be a very lucrative way to generate income and build wealth as your retirement continues.
Not retired yet? Consider a deferred-income annuity
Generally speaking, I’m not a fan of annuities as a primary investment strategy. I feel that there are literally dozens of better ways retirees can use their nest eggs than to simply hand them to a company in exchange for a guaranteed stream of income, often paying a hefty sales commission in the process.
Having said that, there are a few exceptions. One case when I think an annuity can be a good idea is to use some of your money to purchase a product called a deferred-income annuity. In a nutshell, a deferred-income annuity involves you giving a company a sum of money in exchange for income that starts at a later date.
These can be a great way to avoid outliving your money. For example, you can purchase a deferred-income annuity that doesn’t start making payments until you’re 80. So, even if your retirement savings get depleted quicker than you expect, you’ll still be financially secure.
Just as an example, let’s say that you’re 60 and you spend $100,000 on a deferred-income annuity that starts making payments at age 75. Based on today’s rates, you can expect to receive approximately $1,900 in monthly income for the rest of your life after you reach that age.
Look into a reverse mortgage on your home
A traditional mortgage involves you borrowing money from a bank to buy a home, and then paying that money back over time, building your equity in the home. A reverse mortgage does the opposite -- a bank pays you money over time in exchange for equity in your home.
If you own your home, or have substantial equity in it, a reverse mortgage can be a great way to create an additional income stream in retirement.
There are a few things to be aware of before choosing a reverse mortgage as part of your retirement strategy, however. For one thing, reverse mortgages aren’t cheap. Total fees on a new reverse mortgage can be in the 10% range. And of course, a reverse mortgage isn’t appropriate if you plan to leave your home to heirs. Be sure to read a more thorough guide to reverse mortgages if you’re interested, so you can learn the pros and cons of these income-creating products.
Think outside the box
The bottom line is that there are many ways you can boost your retirement income -- especially if you haven’t retired yet. If you’re worried about your income stream after leaving the workforce, you might be pleasantly surprised at the difference you can make by incorporating some of these suggestions into your retirement strategy.