How to Maximize Your Retirement Income: A Guide For Non-Financial Professionals

retirement income

Growing older comes with enough struggles — from physical aches and pains to the frequent changes in our everyday lives. However, we can make things better with strategies to maximize retirement income. 

How to Maximize Your Retirement Income

Retirement planning can be a challenge. After all, it’s not as if you’re planning for a vacation. That’s an event that will begin and end on certain dates, and you can fairly easily know what to expect. However, retirement is filled with uncertainties

We’ve all heard the arguments for why you should save massive amounts of money for retirement. Cue Suze Orman bringing up figures like $5 million or $10 million, essentially because — well, you never know. Of course, Orman is right! We don’t know what the future could hold.

You could die the day after walking out of the office for the last time. Or you might retire at 60 and live to age 99. And in between those extremes, of course, are all kinds of variables.

Retirement Income, A Guide For Non-Financial Professionals

Here’s a not-so-fun list of many of the personal and financial hardships you could face in retirement:

  • Illness
  • Accidents
  • Disability 
  • Paying for an elderly parent or other relative’s nursing home care
  • Forced early retirement
  • Changes to Social Security or tax laws
  • Inflation
  • Stock market volatility 

Okay, okay, we get it. But, unfortunately, lots of stuff can happen, and it’s not all sunshine and fun. The hardest part about planning for a great retirement income is not knowing which financial hardships will hit you. But, on the other hand, you might be one of the lucky ones with fantastic health well into old age.

Avoiding curveballs like chronic illness or multiple traumas help. But it’s best to plan for things not to go according to your ideal plan in retirement. 

Minimize your risk by maximizing returns

To help you minimize the impact of trials on your finances, you can plan and prepare for the best retirement possible. You might not be able to continue earning money after leaving work. But you can pay attention to taxes and fees and other factors that impact how far your money will go. 

Plan for systematic withdrawals throughout retirement

A fairly standard way to make the most of retirement savings is to plan to withdraw a certain amount annually from your accounts for living expenses, keeping the remainder invested to continue earning.

You’ll invest in a diversified set of stocks and other assets and make regular withdrawals monthly and yearly. 

The goal and expectation with systematic withdrawals are that you withdraw a safe amount so that your remainder is invested and continue earning a solid rate of return.

This hedges against inflation and keeps your portfolio going. 

Retirees need to consider not only the average rate of return but the annual rate of return since the current returns impact how much they can comfortably withdraw in any given year.

If you’re not a financial professional, it may be best to consult with a professional in your retirement planning.

The 4% rule

The 4% rule is one strategy for managing retirement income, but it’s not foolproof. It may need to be adjusted depending on your risk tolerance and the state of the market. It’s based on research by William Bengen in what’s known as the Trinity study. 

This research asserted that investing a certain way could enable you to withdraw 4% of your retirement account funds each year for life without running out of money. (This means a 95% chance your money will last for 30 years of retirement.)

The 4% rule assumes an allocation of about 60% of your money in stocks and 40% in bonds and is meant to account for inflation. However, as the Motley Fool and many other experts have said in recent years, the 4% rule has become somewhat outdated, with plenty of flaws. 

Issues with the 4% rule

The 4% rule won’t work perfectly for everyone. While its original research reflected decades of stock market analysis that included some terrible stock market returns, there’s no guarantee the markets won’t have even worse downturns than in the past. Plus, you might allocate your assets differently than the 60-40 ratio. 

Another issue with the 4% rule is that your spending may change from year to year during retirement. While some retirees may be able to maintain fairly steady spending rates, some years, you might face unexpected bills out of your control. 

Some retirees use 4% as a starting point for planning their retirement withdrawals. For example, they might aim for 3% in the first five years of retirement and plan to increase the percentage in subsequent years as medical costs could increase. Or simply adjust withdrawal rates depending on the performance of the overall market to maximize returns. 

Use a bucket strategy

Another way retirees can plan for retirement income is with a bucket strategy. This essentially entails allocating a certain amount of funds to each of several different “buckets” to be used at different points in time. 

A bucket strategy is helpful as a different way of viewing your money. For example, rather than seeing your retirement accounts as one lump sum from which you withdraw a certain “safe” percentage each year, the bucket strategy divides your funds into a few categories. 

One example:

First bucket: This is the money you need to live on for your initial retirement years. This might be the first two to five years or so. You’d earmark this money in cash or cash equivalents, so it’s readily available. The remainder of your funds would be invested in higher-risk, higher-return stocks, but the money you’d need to start retirement would be in a safer place. 

Second bucket: Your second retirement bucket might consist of funds invested in slightly riskier assets, and you’d plan to withdraw from that bucket somewhere around three to ten years into retirement. As you draw down from the first bucket, you’d eventually begin to withdraw from your second bucket. 

Third bucket: In a three-bucket system, perhaps your final stage of withdrawals would be from the ten-year mark and beyond. When you first begin retirement, this third sum of money would be invested in the highest-risk types of assets in the market to ensure the greatest returns. Since you wouldn’t need access to this money for a decade or more, it’s safer to take some risks with it and let it grow to the fullest extent possible. 

Other options: You might prefer a simplified two-bucket system, with the first being for the earlier years of retirement and the second being allocated for spending during the later years. Either way, the sooner you’d need to use the money, the more stable your investments need to be. Money you don’t need for ten years or more, you can afford to deposit into higher-risk investments

Overall, your retirement income might be quite similar whether using systematic withdrawals or a bucket strategy. However, some may benefit from the mental image of separate categories of funds. Some believe this can help investors avoid making rash decisions based on sudden market downturns, such as selling everything in their portfolios. 

Delay Social Security payments as long as possible

A tip often used for increasing retirement income applies with Social Security. Hold off on taking those hard-earned Social Security checks as long as you can. The Social Security Administration increases the amount of your benefits gradually for every month you delay taking benefits, up to a maximum age. 

Millions of Americans depend on payments they receive each month from Social Security. The tricky thing is determining the best time to start getting those Social Security checks. 

Social Security example

The SSA determines your full retirement age based on the year you were born. So if you begin receiving Social Security checks exactly when you reach full retirement age, you’ll get the full 100% of your monthly benefit as expected. However, waiting six months or even a few years to start collecting those checks results in your checks being in a higher amount. 

For example, someone born between 1943 and 1954 has a full retirement age of 66. Waiting an additional year until age 67 means you’d get 108% of your full benefit amount. Each month your delay increases the benefit even more. At age 70, the increase in benefits would stop. 

Ways to delay Social Security

Do you have other forms of income to cover your expenses in your first years of retirement? Then delaying Social Security could be a great way to up your retirement income later on.

For example, perhaps one spouse already has enough retirement income to cover your financial obligations until you reach full retirement age.

Or you might use an immediate annuity to help bridge the gap between when you retire and when you can get the maximum Social Security benefit. 

However, there’s a risk in delaying your Social Security payments. You might not live long enough to reap the benefits of the higher monthly payments.

This isn’t something you can predict with ease. You might start taking Social Security at 66 and get twenty years at the lower amount. Or you could delay until age 70 but only live one more year. The math isn’t going to be perfect, so figure out what will give you the most peace of mind. 

Pay attention to taxes on your 401(k) 

The 401(k) is a great vehicle for saving your money tax-free for retirement. But the trade-off is paying taxes when you make 401(k) withdrawals. In general, your 401(k) distributions are subject to regular income tax, effectively reducing how much you receive. 

You still have to pay taxes in retirement, but some strategies can help reduce your tax burden. 

Monitor your tax bracket

Paying attention to your taxable income is helpful because if you’re approaching the next highest tax bracket, you could find ways to avoid crossing the threshold. For example, you can limit 401(k) or 403(b) withdrawals to stay below the optimum tax level. Another idea is to take a combination of traditional 401(k) withdrawals and Roth or post-tax withdrawals.

Monitor capital gains taxes

The capital gains tax rate is 0% if you remain below certain maximums. For an individual, the max is $40,400 in 2021, according to TaxFoundation.org. A couple filing jointly can go up to $80,800 annually to pay no capital gains. 

Keeping tabs on your withdrawals and, whenever possible, keeping them below that level means avoiding the 15% tax rate on capital gains. 

More 401(k) tax strategies

You might consider one or more of these other ways of minimizing taxes on retirement income. 

  • Tax-loss harvesting (selling underperforming assets to offset taxes on 401(k) withdrawals)
  • Borrow from your 401(k) instead of withdrawing
  • Avoid mandatory 20% withholding by transferring money to an IRA before withdrawing.
  • Again, delaying Social Security payments can help lower your taxable income when taking money from a 401(k)

General tips for retirement income

Plenty of other strategies exist to maximize your retirement income, so don’t count anything out. 

  • Earn income through consulting or part-time work
  • Invest in dividend-paying stocks
  • Downsize or move to a less-expensive area for the cost of living
  • Look into the best ways to receive benefits from your pension, if you have one (both lump sum and lifetime payout have their pros and cons)
  • Use a Health Savings Account (HSA) for some medical expenses
  • Use general budgeting strategies to manage your income and spending

Retirement income is important to maintaining your quality of life for years to come, so don’t be afraid to do your research. Consult a pro to help you analyze your particular circumstances and ensure you maximize the money you earn in retirement.