Here's the bad news: The average monthly Social Security retirement benefit was recently $1,365 per month, or about $16,000 per year, with the maximum benefit for those retiring at their full retirement age recently at $2,687 per month -- or about $32,000 annually. Clearly, Social Security isn't going to give any of us a luxurious retirement.
There's good news, though: There are many ways that you can generate retirement income. It's smart to spend a little time figuring out how much money you'll need in retirement, and then planning how you can produce your needed cash flow. Here are a dozen strategies to consider.
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1. Delay retiring
This one won't win a popularity contest, but it can be very effective. If you can work two or three more years than you originally planned to, your nest egg can grow while you put off starting to tap it. You might enjoy your employer-sponsored health insurance for a few more years, too, perhaps also while collecting a few more years' worth of matching funds in your 401(k).
Here's what a difference this can make in your investing: Imagine that you sock away $10,000 per year for 20 years and it grows by an annual average of 8%, growing to about $494,000. If you can keep going for another three years, still averaging 8%, you'll end up with more than $657,000! That's more than $160,000 extra just for delaying retiring for a few years.
2. Work in retirement
Next, consider easing into full retirement instead of jumping in feet first. If you're willing and able to work a little in your first few years of retirement, you can generate some helpful income. Working just 12 hours per week at $10 per hour will generate about $500 per month.
Better still, a part-time job can also give your days more structure and regular opportunities for socializing. Many retirees find themselves restless and a bit lonely in retirement, and a low-stress job on the side can be quite helpful.
Here are some ideas of ways you might work in retirement: You could be a cashier at a local retailer or deliver newspapers. You might do some freelance writing or editing or graphic design work. You might tutor kids in subjects you know well, or perhaps give adults or kids music or language lessons. You might do some consulting -- perhaps even for your former employer. You could babysit, walk dogs, or take on some handy-person jobs. These days the Internet offers even more options. You might make jewelry, soaps, or sweaters, and sell them online. You might even just work part-time for your current employer.
3. Pay off debts
Think twice before entering retirement with a lot of credit card debt or other high-interest debt. When you're living on a reduced income, it will be extra hard to pay that off, and those payments can hurt your ability to make other necessary payments. It's a good idea to enter retirement mortgage-free, too, if you can, so that you don't have to make any mortgage payments and will only have to deal with insurance, taxes, and maintenance.
4. Collect interest
This great retirement income strategy is only great at certain times -- when interest rates are meaningful. Right now if you park $100,000 in certificates of deposit paying 1.5% in interest, you'll collect $1,500 per year, hardly a helpful sum. Back in 1984, though, rates for five-year, one-year, and six-month CDs were in the double digits. If you could get 10% on a $100,000 investment, you'd enjoy $10,000 per year, equivalent to about $830 per month. Low interest rates not only deliver little income, but they also don't keep up with inflation.
Bonds are another interest-paying option, but the safest ones (from the U.S. government) tend to pay modest interest rates, especially in low-interest-rate environments. Still, if you have a lot of money, you might make this strategy work by buying a variety of bonds that will mature at different times, generating income over many years.
5. Use retirement savings accounts
The more you contribute to tax-advantaged retirement savings accounts such as IRAs and 401(k)s, the more money you'll have in retirement. There are two main kinds of IRA -- the Roth IRA and the traditional IRA -- and for both in 2017, the contribution limit is $5,500 for most people and $6,500 for those 50 and older. (Limits are occasionally increased, to keep up with inflation.) That might not seem like a lot of money, but it's quite powerful if it can grow for many years. The following table shows how much money you can accumulate with annual $5,500 contributions at different average annual rates of growth:
A 401(k) has much more generous contribution limits -- for 2017 it's $18,000 for most people and $24,000 for those 50 or older. Give particular consideration to Roth IRAs and Roth 401(k)s, which are increasingly available, as they let you withdraw money in retirement tax-free!
6. Buy fixed annuities
While some annuities, such as variable annuities and indexed annuities, can be quite problematic, often charging steep fees and sporting restrictive terms, fixed annuities are well worth considering. They're much simpler instruments, and they can start paying you immediately or on a deferred basis. Following are examples of the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment. (You'll generally be offered higher payments in times of higher prevailing interest rates.)
Annuities can provide much peace of mind, removing stock market moves and the economy's current condition from your worries. A deferred annuity can also be smart, starting to pay you at a future point, such as when you turn a certain age. A 60-year-old man, for example, might spend $100,000 for an annuity that will start paying him $962 per month for the rest of his life beginning at age 70. That can remove any worries about running out of money late in life.
7. Enjoy dividend income
You can generate income in retirement by selling off shares of stock from your stock portfolio over time -- but with dividend-paying stocks, you can collect income without having to sell any shares! A $300,000 portfolio, for example, that sports an overall average yield of 4% will generate about $12,000 per year -- a solid $1,000 per month. Dividend income isn't guaranteed, but if you spread your money across a bunch of healthy and growing companies, you'll probably receive regular -- and growing -- payments. Here are a few well-regarded stocks with significant dividend yields:
A dividend-focused exchange-traded fund (ETF) can be a fine option, too, offering instant diversification. The iShares Select Dividend ETF, for example, recently yielded about 3%. Preferred stock is another way to go. The iShares U.S. Preferred Stock ETF recently yielded 5.6%.
8. Consider a reverse mortgage
Next, you might consider a reverse mortgage. It's essentially a loan secured by your home. A lender will provide (often tax-free) income during your retirement, and the loan doesn't have to be paid back until you no longer live in your home -- perhaps because you moved into a nursing home or died. It has some drawbacks, though, such as requiring your heirs to sell your home unless they can afford to pay off the loan, but if you're really pinched for funds and no one is counting on inheriting your home, it can be a solid solution.
Another home-related retirement-income option is relocating. If you downsize and move to a smaller home -- or you move to a region with lower taxes or a lower cost of living -- you can end up spending less on taxes, insurance, home maintenance, utilities, landscaping, and so on. The median home value in California, for example, was recently about $386,000, but it was only $248,000 in Colorado and only $140,000 in South Carolina.
10. Borrow against your life insurance
Borrowing against your life insurance is another option. If you have a life insurance policy that no one is depending on -- such as if the children you meant to protect with it are now grown and independent -- you might consider borrowing against it. This can work if you've bought "permanent" insurance such as whole life or universal life, and not term life insurance, that generally only lasts as long as you're paying for it. You'll be reducing or wiping out the value of the policy with your withdrawal(s), but if no one really needs the ultimate payout, it can make sense. Plus, the income is typically tax-free.
11. Think outside the box
A little creative thinking can pay off well when it comes to retirement income, too. You may be able to come up with some ways to spend less and/or bring in more money. For example, you could spend less by quitting cable TV and just streaming your video entertainment -- that might save $50 you per month or $600 per year. If you're not using the gym much but are paying $40 monthly for it, that's another $500 or so in potential annual savings. Believe it or not, you might save hundreds of dollars just by spending an hour on the phone calling insurance companies to get the best current deal on your home insurance and car insurance. Eating out less and having friends over to play games or watch movies can save on dining and entertainment expenses. If you smoke, you can probably save thousands of dollars per year by quitting -- and you might lengthen your life, too!
To bring more moola in, you might rent out a room now and then via Airbnb, or even take in a boarder for a year or two. If you're not already using cash-back or rewards credit cards, look into them. If you charge about $1,200 per month on credit cards and earn 2% back, on average, you're looking at close to $300 in cash back per year. Clear out your basement, attic, and/or garage by selling things online or via a yard sale and you might net hundreds of dollars. Or take an easier route and donate clothes and household items to charity, reaping tax deductions. You could make things to sell online, too, such as soaps, furniture, or jewelry. Reducing your household's automotive fleet by one vehicle can save a lot in insurance and upkeep, too.
12. Maximize Social Security
Finally, learn more about Social Security strategies. Just as there are many ways to boost your retirement income, there are a bunch of ways to boost your Social Security income, as well. You can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age, which is 66 or 67 for most of us, and you can make some smart moves by coordinating with your spouse when you each start collecting. If you and your spouse have very different earnings records, for example, you might start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, you both get to enjoy some income earlier, and when the higher earner hits 70, you can collect their extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks.
Clearly, there are lots of ways that you might increase your income in retirement. Give the dozen listed here some consideration and see which ones make sense for you.
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Selena Maranjian owns shares of Ford and Verizon Communications. The Motley Fool owns shares of and recommends Ford and Verizon Communications. The Motley Fool recommends Chevron and Cisco Systems. The Motley Fool has a disclosure policy.