Just Explain It: Maximizing Your Retirement Income Without Working
Thanks to advances in healthcare, retirees are living longer than ever – sometimes stretching their retirement out 20 years or more.
According to the 2010 US Census and the National Center for Health Statistics, the number of Americans 65 and older is growing. In 2010, the 65-74 age group (20.8 million) was 10 times larger than in 1900. The 75-84 group (13.1 million) was 17 times larger and the 85+ group (5.5 million) was 45 times larger.
One major concern for most retirees is outliving their life savings. That’s why it’s important to plan well for your retirement.
Which brings us to today’s Just Explain It.
What are the best ways to maximize your income in retirement without working?
Here are some suggestions.
It’s a given that at some point you’ll have to pay taxes on your savings. How much is the question. That depends on the strategy you use to minimize the tax impact. For example, experts advise leaving most of your money tax-deferred in a 401(k) or an IRA account. The more money in your account, the faster it will grow tax-free.
Taxes aren’t the only area you should focus on.
An annuity is one way to generate income during your retirement. The principle is simple. You deposit a lump sum of money with an insurance company. Then when you retire, the company pays you back in installments based on the distribution option selected. For example, a term certain annuity will guarantee payouts for a specific number of years. A life annuity, on the other hand, would be for as long as you live.
However, annuities are usually expensive. They can be loaded down with maintenance and administrative fees, and upfront sales and back-end surrender charges.
The good thing is that you’ll have regular income, but not without risks. If you die after collecting your first check, your family may lose most of your initial payment. Also, the insurance company can go bankrupt and default on your contract. And like most income, an annuity is taxable at current tax rates.
To avoid being taxed on interest, some investors choose municipal bonds, or munis. They’re used to pay for projects such as the construction of highways, bridges or schools. The federal government doesn’t tax the interest payments on most of these bonds. Neither does the state or the city that you reside in.
On top of that, municipal bonds are a safer bet than other types of bonds. Statistics show that between 1970 and 2000, 99% of municipal bonds paid back the promised interest and principal. In that same time, 90% of bonds issued by private companies and investment firms paid back as promised.
Munis usually have lower yields than other types of bonds. That’s why it’s a better deal for investors in the 25% or higher tax brackets. If you’re in a tax bracket below 25%, then buying a taxable bond that pays a higher interest rate makes more sense most of the time.
Your retirement income plan is probably the most important investment decision you’ll make in your life. There are many options out there…one size doesn’t fit all. It’s up to you to find what works best for your situation.
Did you learn something? Do you have a topic you’d like explained? Give us your feedback in the comments below or on Twitter using #JustExplainIt.
