Growing your nest egg and generating retirement income is more challenging for today's pre-retirees than ever before. Why is this happening? People are nervous about investing – and potentially losing – their money in a stock market that's been riding record highs and could drop any time. Historically low interest rates mean the return on CDs is practically zero, while the potential for increased rates makes bonds a less attractive investment option. Plus, there's a very good chance that all Americans could be paying a lot more in taxes over the next few years.
Although these challenges exist, the good news is that it's possible to make your money work harder for you in retirement. You can maximize the value of your savings with these three simple steps.
Step #1: Reduce Your Taxes in Retirement
Most people believe they'll pay less in taxes once they retire. And in some ways, it makes sense: After all, you're no longer earning a consistent paycheck. But just because an employer isn't handing you money doesn't mean you're not receiving taxable income.
When you retire, you'll most likely draw income from an IRA, 401(k), and Social Security benefits. Maybe you'll have other investment income, and you might even receive a pension check. These sources of income become your "regular paycheck" in retirement.
The problem is that all these sources of income are 100% taxable when you receive them. When you add up all your retirement income, you could be in a similar or even higher tax bracket as you were before retirement. And the chances are good that tax rates could increase in the future, leaving you with an even higher tax bill than anticipated.
Many people mistakenly believe there is nothing they can do to plan for – and protect against – high taxes in retirement. Fortunately, you can keep taxes from taking a big bite from retirement income. How? By planning for smart distribution strategies from a mix of taxable and tax-free income sources.
Step #2: Create a Plan to Generate Income in Retirement
Warren Buffett famously said, "If you don't find a way to make money while you sleep, you'll work until you die." While that may sound a bit dramatic, generating income is indeed vital to ensuring you'll have enough money to last throughout your life.
However, the big question for most people is how to generate income. In the current market environment, CDs are offering next-to-zero rates while bond yields remain at record lows. And while opportunities abound in the stock market, some investors are nervous about a potential drop after markets have remained at all-time highs for such a long period.
We admit, generating income in retirement is very challenging in the current market environment. The good news is that there are some surprisingly attractive options to generate income during retirement by choosing investment strategies that maximize growth while minimizing risk.
Step #3: Get the Most from Your Social Security Benefits
In 2021, more than 46 million retirees received a monthly Social Security check.1 Yet most Americans are losing out on available Social Security benefits – and it's all because they claim their benefits at the wrong time.
Deciding when to claim Social Security benefits is much more complicated than many people realize. Claim too early, and you could miss out on tens of thousands of dollars in retirement income. But other what-ifs factor into knowing when to start benefits. Pre-retirees frequently ask questions such as, What if you're forced to take early retirement? What happens if your spouse passes away? How will Social Security benefits impact Medicare premiums and taxes? Your financial advisor can help you answer these questions and pinpoint the right time for you to start taking Social Security benefits.
Maximizing your retirement savings can be complicated and overwhelming, especially if you apply a do-it-yourself approach. A trusted financial advisor can help you find the right strategies to reduce taxes, generate income and maximize Social Security benefits in retirement.
1 SSA.gov. "Fact Sheet: Social Security." https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf . Accessed Nov. 30, 2021.