Here’s the bad news: The average monthly Social Security retirement benefit was recently $1,365 per month, or about $16,000 per year, with the maximum benefit for those retiring at their full retirement age recently at $2,687 per month — or about $32,000 annually. Clearly, Social Security isn’t going to give any of us a luxurious retirement.
There’s good news, though: There are many ways that you can generate retirement income. It’s smart to spend a little time figuring out how much money you’ll need in retirement, and then planning how you can produce your needed cash flow. Here are a dozen strategies to consider.
1. Delay retiring
This one won’t win a popularity contest, but it can be very effective. If you can work two or three more years than you originally planned to, your nest egg can grow while you put off starting to tap it. You might enjoy your employer-sponsored health insurance for a few more years, too, perhaps also while collecting a few more years’ worth of matching funds in your 401(k).
Here’s what a difference this can make in your investing: Imagine that you sock away $10,000 per year for 20 years and it grows by an annual average of 8%, growing to about $494,000. If you can keep going for another three years, still averaging 8%, you’ll end up with more than $657,000! That’s more than $160,000 extra just for delaying retiring for a few years.
2. Work in retirement
Next, consider easing into full retirement instead of jumping in feet first. If you’re willing and able to work a little in your first few years of retirement, you can generate some helpful income. Working just 12 hours per week at $10 per hour will generate about $500 per month.
Better still, a part-time job can also give your days more structure and regular opportunities for socializing. Many retirees find themselves restless and a bit lonely in retirement, and a low-stress job on the side can be quite helpful.
Here are some ideas of ways you might work in retirement: You could be a cashier at a local retailer or deliver newspapers. You might do some freelance writing or editing or graphic design work. You might tutor kids in subjects you know well, or perhaps give adults or kids music or language lessons. You might do some consulting — perhaps even for your former employer. You could babysit, walk dogs, or take on some handy-person jobs. These days the Internet offers even more options. You might make jewelry, soaps, or sweaters, and sell them online. You might even just work part-time for your current employer.
3. Pay off debts
Think twice before entering retirement with a lot of credit card debt or other high-interest debt. When you’re living on a reduced income, it will be extra hard to pay that off, and those payments can hurt your ability to make other necessary payments. It’s a good idea to enter retirement mortgage-free, too, if you can, so that you don’t have to make any mortgage payments and will only have to deal with insurance, taxes, and maintenance.
4. Collect interest
This great retirement income strategy is only great at certain times — when interest rates are meaningful. Right now if you park $100,000 in certificates of deposit paying 1.5% in interest, you’ll collect $1,500 per year, hardly a helpful sum. Back in 1984, though, rates for five-year, one-year, and six-month CDs were in the double digits. If you could get 10% on a $100,000 investment, you’d enjoy $10,000 per year, equivalent to about $830 per month. Low interest rates not only deliver little income, but they also don’t keep up with inflation.
Bonds are another interest-paying option, but the safest ones (from the U.S. government) tend to pay modest interest rates, especially in low-interest-rate environments. Still, if you have a lot of money, you might make this strategy work by buying a variety of bonds that will mature at different times, generating income over many years.
5. Use retirement savings accounts
The more you contribute to tax-advantaged retirement savings accounts such as IRAs and 401(k)s, the more money you’ll have in retirement. There are two main kinds of IRA — the Roth IRA and the traditional IRA — and for both in 2017, the contribution limit is $5,500 for most people and $6,500 for those 50 and older. (Limits are occasionally increased, to keep up with inflation.) That might not seem like a lot of money, but it’s quite powerful if it can grow for many years. The following table shows how much money you can accumulate with annual $5,500 contributions at different average annual rates of growth:
|$5,500 Invested Annually For:||Growing at 6%||Growing at 8%||Growing at 10%|
A 401(k) has much more generous contribution limits — for 2017 it’s $18,000 for most people and $24,000 for those 50 or older. Give particular consideration to Roth IRAs and Roth 401(k)s, which are increasingly available, as they let you withdraw money in retirement tax-free!
6. Buy fixed annuities
While some annuities, such as variable annuities and indexed annuities, can be quite…