The first step to retirement planning is figuring out your expected income and expenses during your non-working years. For the purposes of this calculation, income will be defined as social security benefits and other fixed payments while your spending estimate should be based on current expenditures adjusted for cost of living changes over the course of your retirement (no commuting costs, rising healthcare bills, inflation, etc).
Once you’ve developed a rough approximate for both of these sums, you will be able to determine your retirement income gap. If you want to maintain your current quality of life in the future, then you will need to ensure that this difference is covered through alternative sources of income.
When it comes to bridging the gap there are a number of effective strategies that you can deploy.
Work a Few More Years
It might not be the most appealing option, but delaying your retirement a couple of years can reap huge benefits in the long-term. First of all, it will afford you the opportunity to put more money towards savings while increasing compound interest on your existing nest egg.
Working longer will also enable you to claim social security benefits at a later date, which could have a significant effect on the amount of fixed income you receive after retirement.
Observe the 4% Rule
This strategy states that withdrawing no more than 4% of the total value of your nest egg on a yearly basis will allow you to keep your savings intact for up to 30 years. These withdrawals can be increased on a yearly basis to account for inflation. Now, it should be noted that market volatility and low interest rates may reduce the expected returns on your savings, but as long as you’re keeping a close eye on the economy, your investment performance, and overall spending, then the 4% rule can provide a handy guideline for future withdrawals.
Opt For Annuities
Annuities are some of the most secure and flexible retirement savings products on the market. An annuity is essentially a contract which guarantees clients principal protection and the options for a fixed rate of income for life. You can access these products by either paying a one-time lump sum amount or through a series of flexible premiums. Annuities offer a number of benefits over other options.
- There is no set contribution limit, so you can put as much income towards your retirement as you need.
- All contributions are tax-deferred, which means that all accumulated savings and interest will remain intact until the time comes to cash out.
- By annuitizing your payments you gain the assurance of regular income over the remainder of your lifetime. Annuities help to form the foundation for a stable, long-term retirement strategy.
- Unlike mutual funds, fixed index annuities are not subject to ongoing commissions or fees that could substantially reduce your savings over time. Opting for these assets under management (AUM) products will expose you to the risk of annual payments even in periods where the overall value of your portfolio falls.
- Clients can add riders to provide additional benefits such as enhanced incomes if you cannot perform 2 out of 6 ADLs, death benefits, joint income etc. These riders could also be linked to a guaranteed income growth rate or be performance based during the period of accumulation.
If you’re worried about stretching your savings across the duration of your retirement then the right annuity can ensure that you never outlive your income sources. Because there’s so much flexibility in these products, it’s always important to consult with an informed financial advisor so that get an annuity that’s suited to your lifestyles, savings profile, and retirement objectives.
Leverage Home Equity
In today’s red hot housing market many senior homeowners are opting to leverage their home equity by taking out a reverse mortgage. These loans are generally used to cover expenses while retirees delay their social security benefit claims. However, homeowners should think long and hard before pursuing this option, as the risks and future costs of a long-term loan may outweigh the benefits of a larger social security check.
A more prudent alternative would be to trade in a large home for smaller property while putting the profits towards savings and retirement income. This strategy will reduce your annual maintenance and utility costs. Many retirees also choose to relocate to less expensive communities where their savings and benefits can go much further.
Change Your Spending Habits
In the years preceding your retirement you should be looking to maximize your savings by minimizing your monthly expenditures expenses. There are a number of strategies you can employ here.
- Work on a systematic debt reduction strategy that will provide long-term cost savings. We recommend putting excess funds towards the payment of your highest-interest loans until these outstanding amounts are completely paid off. Then move onto the next highest outstanding balance.
- If you have a strong relationship with your finance provider and a good credit score then you may want to call up your bank or credit card agency to see if they are willing to refinance the terms of your loan. Even a few percentage points can make a difference.
- Alternatively, you could look to transfer outstanding credit card balances to a zero interest or low interest credit card that will allow you to pay off a significant portion of your debt without incurring extra interest over the period.
- Assess your current insurance plans and determine how necessary they are to securing your future quality of life.
- If you own a second automobile then consider selling the asset. Now that you’re no longer doing a daily commute, you can probably make do with a single vehicle.
In general, reducing your living costs is always a good choice when you’re looking to close the retirement income gap. After retirement, you should look to create a new monthly budget that emphasizes prudent spending. Some key areas to focus on include utilities, groceries, and entertainment costs.
Licensed Insurance Professional. Provides general information about insurance and retirement-related products and services. These products and services may not be specific to a particular state. Information provided on this website, in seminars or through printed or other published materials are not intended as specific legal, accounting or investment advice to an individual’s particular situation. By providing your information to us, you agree that we may contact you regarding the potential sale of annuity and/or insurance products. Information provided by Licensed Insurance Professional does not necessarily represent that of the individual professionals presenting this information. All the information presented is believed to be accurate and is secured from reliable resources, however, no guarantee is made to the completeness or accuracy of the information presented. Any opinions expressed are those of the author and the material presented is for educational and informational purposes only and is not intended as legal, investment or tax-related advice..
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