Income Strategies That Can Increase Your Income in Retirement
Holistic income strategies can deliver more money to spend.
You can get more after-tax retirement income when you use the right income strategies. The key is making sure your income strategy incorporates taxes, Social Security, your asset allocation, and your retirement accounts. A great retirement income strategy looks at how these items can work together, rather than looking at each decision in isolation.
There are three key things you need to consider when putting together an income strategy. You must look at how each of the factors below can be coordinated to deliver more retirement income for you.
1. Social Security Income Strategies
Many people collect Social Security benefits without considering the real value of these benefits. Do you realize that in many cases your Social Security benefits are worth more than $500,000? Would you make a decision about $500,000 without any analysis first? I hope not.
There are strategies you can use to increase the amount of income you'll get from Social Security benefits. These Social Security income strategies are of the most value to married couples using the spousal benefit.
It's best to use a Social Security calculator to develop a smart Social Security income strategy, and you need to consider and project how your Social Security benefits will be taxed, and how your Social Security claiming decision will affect the total amount of after-tax income you will have throughout your retirement years.
2. Income Strategies to Reduce Taxes
When developing a retirement income strategy, many people forget about the impact of taxes in retirement. They are also unaware of how Social Security benefits are taxed and how retirement taxes change when you take money out of retirement accounts, begin your required minimum distributions, change your tax filing status, or pay off a mortgage.
When your coordinate these decisions, it results in more after-tax income for you. As you near retirement it is important to do detailed tax planning. You want to have a balance of after-tax savings verses pre-tax savings. You want to evaluate the impact of taking IRA withdrawals early and taking Social Security later versus taking Social Security early and taking IRA withdrawals later. Approaching these decisions in a thoughtful way can increase your after-tax retirement income.
The amazing thing about an income strategy that incorporates taxes is that it has nothing to do with the investments you choose. Anyone who develops income strategies based only on investment choices is making a big mistake. Taxes matter.
3. Investing and Allocation Income Strategies
The last component of an income strategy is choosing investments. This should occur after you develop a Social Security claiming strategy and a plan that looks at your after-tax income. Once your plan is in place, you can begin to look at specific investment choices that produce the type of income you want.
One of the factors to consider is the amount of guaranteed income you will have compared to the amount of variable income you will have. You also need to consider which accounts to put which investments in so that the outcome is more tax efficient.
Withdrawals from retirement accounts are not all taxed the same. Investment income is not all taxed the same way. It may be to your benefit to put certain types of investments inside your Roth IRA, where they grow tax-free and withdrawals are tax-free, and other types of investments inside other accounts, rather than have each account function as its own balanced portfolio.
You’ll also want to determine when to take withdrawals from which accounts so you can develop an income strategy that matches your investments to your anticipated cash flow needs.
Once the planning is in place, you can begin to evaluate specific retirement investments to see if they are appropriate for you.
Bad Income Strategies
Shooting for the fences with your retirement money is a bad idea. Any income strategy that involves too much risk could end up leaving you with no income at all. I have watched too many people lose nearly all their retirement money by pursing a “sure thing”. When it comes to a good income strategy, nothing beats a diversified approach.