5 Ways to Stretch Your Retirement Budget
One way to help guarantee that you will enjoy a good quality of life during retirement is to ensure that you are able to meet any necessary financial obligations with your budget. Let's look at some of the ways you can keep from outliving your assets.
1. Determine Your Financial Readiness
Before deciding when you will retire, work with a financial planner to determine your financial readiness for retirement. While there are many free calculators available on the internet that promise to provide an assessment of your retirement readiness, these generally don't include all the pertinent factors to be considered and should be regarded as a very rough indicator.
Consider working with a financial planner who is experienced with retirement planning and can provide you with a comprehensive assessment. A financial planner will also be able to provide you with a realistic road map to your retirement. This road map should include amounts you have already saved, the plans you have put in place and the steps you need to take to help you achieve a secure retirement. (For further reading, check out Dispelling 5 Myths About Financial Planners and Financial Planning: It's About More Than Money.)
2. Consider Adding Annuities to Your Portfolio
Enjoying an above-average return on your investments is an attractive goal. However, as you get closer to retirement, your risk tolerance will likely decrease, thereby increasing the need for safer investments. Most financial planners recommend diversifying your portfolio so that you can enjoy the various levels of returns, from guaranteed to high risk/reward.
“A diversified portfolio provides a much larger payout during retirement than a 100% cash portfolio when using RMD-based withdrawals,” says Craig L. Israelsen, Ph.D., designer of the 7Twelve Portfolio, in Springville, Utah. “Diversification makes a lot of sense…in portfolios and diets!”
One way of enjoying the best of both worlds is to invest your assets in annuities. Be careful though, as all annuities are not created equal. When choosing one, determine your objective and then choose an annuity that's the most suitable for you. The following are some general features of annuities:
|General Features||Fixed Annuity||Variable Annuity|
|Guaranteed principal, where you cannot lose the amount you invest regardless of the performance of the underlying investments||√||–|
|Principal and return are not guaranteed||–||√|
|Guaranteed earnings at a fixed rate of interest or fixed amount for a fixed period. Some programs pay interest in addition to the minimum guaranteed amounts||√||–|
|Invested in funds with a particular investment objective, with payments to you determined by the performance of the fund. Fund usually includes a mixture of stock, bonds and money markets||–||√|
|Equity-indexed, where the value is based on the performance of the chosen stock index||√||–|
|Market value adjusted; you are usually permitted to choose the period of investment and the interest rate of return within established limits. You may be allowed to make withdrawals before the end of the investment period||√||–|
|Deferred annuity, which is designed for savings, growth, investing and deferred income. Usually can be purchased with a lump sum amount or multiple deposits. Usually appropriate if goal is planning for retirement and you have a relatively long period before you retire||√||–|
|Immediate annuity, which is designed to pay income immediately after the annuity is purchased. Usually purchased with one lump sum amount (single payment). Usually appropriate if you are near retirement or already retired and you want to turn a lump sum amount into a stream of periodic income amounts, with payments beginning immediately after the annuity is purchased||√||√|
|Fixed or guaranteed period, where you receive payments for a fixed number of years. If you die before the period expires, your beneficiaries will receive payments for the remaining period||√||√|
|Lifetime annuity, with payments continuing for as long as you live, and ceasing upon your death||√||√|
|Joint and survivor annuity, with payments continuing to you for as long as you live,and continuing to your beneficiary – usually your surviving spouse – for as long as he or she lives||√||√|
|Qualified (purchased with assets from retirement plans such as IRAs, qualified plans and 403(b) accounts)||√||√|
|Nonqualified (purchased with after-tax funds that are not held in a retirement plan)||√||√|
|Regulated by state insurance departments||√||√|
|Regulated by the federal Securities and Exchange Commission||–||√|
These are just some general features. Some annuities are customized to include multiple features. For instance, a variable annuity can also include a fixed component to guarantee a portion of your principal and some return on your investment. Check with your provider to determine the specific features and benefits of its annuity offerings.
“When selecting a lifetime annuity payment versus a lump sum, you have some valuable information that the life insurance actuaries do not have: the state of your personal health,” says James B. Twining, CFP®, founder and CEO, Financial Plan, Inc., in Bellingham, Wash. “An investor with a family history of longevity and excellent personal health may be advantaged by selecting the lifetime annuity option. If the investor lives beyond life expectancy, they can ‘beat the odds’ by continuing to collect the payments into very old age.”
Fees and Ratings
The fee structure is another key feature that should be reviewed before an annuity is purchased. The fees for variable annuities are usually higher than those that apply to fixed annuities.
When choosing an annuity provider, fees should not be the only deciding factor. You should also check the rating of the insurance company to help ensure you invest with a company that is financially sound. Ratings can be obtained from A.M. Best, Standard and Poor's, Moody's, Duff and Phelps and Weiss Research. (For more on annuities, see Inflation-Protected Annuities: Part of a Solid Financial Plan, Deciphering Deferred Annuity Designations and Watch Your Back in the Annuity Game.)
Work with a qualified financial planner to help you determine whether an annuity is right for you, and if so, which one best suits your financial profile.
3. Decide When to Take Social Security and the Type of Pension Payout You Want
Income from Social Security will help to defray expenses during retirement; therefore, you should determine the best time to start receiving payments to get the most benefit. (For more, read Introduction to Social Security and Retiring Early: How Long Should You Wait?)
You can begin to receive Social Security benefits at age 62; however, your benefits will be permanently reduced. What's more, if you receive Social Security benefits before the year you reach full retirement age (FRA), your benefits will be reduced by $1 for every $2 you earn above the annual limit.
In the year you reach FRA, your payment will be reduced by $1 for every $3 you earn above the limit in effect for the year, but the Social Security Administration will factor in only earnings before the month you hit your FRA. The month you're at FRA, you can receive your benefits with no reduction.
If you wait until you reach age 70 to take Social Security, you'll reap the reward of even higher monthly benefits.
Lump-Sum vs. Annuity Payments from Pensions
Many defined-benefit, money-purchase and target-benefit pension plans offer employees two options for distributing their plan benefits: a lump-sum payment or an annuity payment. If you are faced with choosing between the two, talk with your financial planner before making the decision.
A financial planner will usually look at your other assets and determine whether it would be more fiscally practical for you to receive a guaranteed stream of payment over your lifetime, with payments continued to your spouse if he or she outlives you, or if you should invest your retirement funds in other assets. (For more insight, check out Immediate Annuities: More Income and Lower Taxes and The Demise of the Defined-Benefit Plan.)
4. Consider a Working Retirement
Of course, reaching retirement age doesn't mean you have to stop working, especially if you find your occupation fulfilling and enjoyable.
Continuing to work in retirement not only means additional income, but it could also mean enjoying the benefits usually offered by employers under a cafeteria plan, such as group health insurance for medical, dental and vision, and flexible spending accounts. This can save you significant amounts on funds that would otherwise be allocated toward these items. (To learn more, read Stretch Your Savings by Working into Your 70s.)
5. Pinch Your Pennies – Now that You Know How Many You Have
Retirement is a time to enjoy life as much as you can without worrying too much about finances. You can accomplish this state of mind by budgeting.
Budgeting will help you to determine the lifestyle you can afford. Once you use your budget to determine your disposable income, you can make it stretch farther by taking advantage of discount programs available to retirees. (Read The Beauty of Budgeting to learn more.)
Many movie theaters, for instance, offer a discount program for seniors that could allow you to see two movies for the price of one. From supermarkets to transit, there is a wide variety of senior discounts available. Check official websites for your state and town – many list such programs – and the AARP website. If you are not sure whether a business offers such discounts, don't be afraid to ask. If you're in your 50s, you may be eligible for some of them already, as Senior Discounts So Soon? points out.
Many discount programs were started because business owners realized they could build a loyal clientèle of appreciative seniors. You might want to help pioneer a program at your favorite store.
The Bottom Line
Being financially stable becomes even more critical during your retirement years, as you will likely have less income from employment and will have to rely on your savings, Social Security and, if you're lucky, a pension.
Before deciding when you should retire, you may want to work with a financial planner to determine your financial readiness for retirement. Together you can create a comprehensive assessment to determine a plan of action that will ensure you don't outlive your assets and that you get the most out of your available resources.
A financial product that pays out a fixed stream of payments ...
The time between the end of the business day of the first business ...
An immediate variable annuity is an insurance product where an ...
A secondary market annuity (SMA) is a transaction in which the ...
A type of annuity contract that delays payments of income, installments ...
A financial product sold by insurance companies that requires ...