Ways to Produce More Retirement Income

Your income and wiliness to save determines your level of financial comfort in retirement more than any other factors.  As a rule of thumb, in investments you need to save about $1M for every $40,000 increment of sustainable inflation adjusted income you wish to generate through retirement.  This takes planning and disciple.  Some mid-life financial moves may help to boost it.  

One important move is to max out retirement accounts. Yearly contributions of $5,500 to an IRA starting at age 45 will grow to $214,460 by age 65 at a 6% annual return. At an 8% annual return, that becomes $271,826. (This does not even take catch-up contributions into account.) You can also delay retiring. At an 8% annual return, annual investments of $10,000 in the typical tax-deferred employee retirement plan will grow to $35,061 in just three years, and $63,359 in five years.  Strive to maximize your allowable contributions and always take advantage of employer matching dollars in your 401k.

You can also strategize when to claim Social Security.  Assuming you were born before 1954 and claim social security in the first year of eligibility (62) you will receive 75% of your full retirement age benefit.  On the flipside if you delayed taking social security until age 70, your monthly benefit will increase to 132% of your full retirement age benefit.  The increase in benefit is linear by month from age 62 to 67 (full retirement age) and also from 67 to age 70.  Every month you delay, your benefit grows. If you anticipate living a normal life span, delaying pays off.

Transform non-earning assets (such as your home, collectibles, and vehicles) into income-producing assets. If you are “house rich and cash poor,” consider the potential of downsizing: $300,000 in freed home equity invested at a 7% yearly return could produce $21,000 in annual income. Some retirees arrange sale-leaseback agreements with their adult children: they sell their home to their kids, then rent it back. The retirees stay in their home and get a little more cash to spend, while the younger, higher-earning generation makes the most of homeowner tax breaks.^1,2

Use health savings accounts (HSAs) as a saving vehicle.  HSA accounts are available to individuals or families that have high deductible medical plans.  Dollars can be deposited into these account by the plan owner or an employer.  Contributions to an HSA are tax deductible in the year of contribution and can be used tax free in when used for qualified medical expenses.  Current contribution limits are $3,400 for individuals and $6,750 for families.  This limit increases by $1,000 if you are over the age of 55.  Instead of depleting your HSA as you incur medical expenses, you could save it use during retirement.  If you are over the age of 65, the account is treated similar to an IRA, where you pay tax on the proceeds and use the money for any purpose you like.  The funds will always be tax free for medical usage.  Did you know that many HSA accounts have investment options available within the plan, so you really can utilize it like an additional IRA.

If you have questions or would like to discuss further, feel free to reach out.