If you want a smooth retirement, it’s not enough to simply tuck away part of your paycheck during your working years and worry about the rest later.
You need to make sure the money will keep flowing when you actually need it, and make plans to weather an unpredictable future.
The sooner you look at your options, the more bumps you can avoid on your retirement ride. Here are six ways you can plan ahead to ensure you have a reliable income in retirement.
1. Create a Social Security claiming strategy
Social Security is often the first thing people think of when it comes to retirement income. After all, it’s a steady income we receive, after paying into the system through our working years via a payroll tax, that grows with inflation without our needing to take risks. And it’s largely automatic.
But you still must have a claiming strategy in place long before you need it to maximize your lifetime benefits.
While you can begin claiming Social Security as early as age 62, you’ll have a permanently reduced benefit if you do. If you wait until 70, on the other hand, you’ll get the maximum monthly payout for which you are eligible.
That doesn’t necessarily mean you should wait until you’re 70 — there are times when doing so doesn’t make sense. So, look at the numbers and find out what will work for you, far in advance. You can get professional help figuring this out.
2. Find a job with a pension — if you can
Although 401(k) plans are one of the most popular retirement saving vehicles today, they only really burst onto the scene in the early 1980s. Before that, millions of American workers had a very different retirement benefit: a pension.
With pensions, you build up the benefit over your working life and then receive a guaranteed monthly check in retirement.
Pensions are much rarer these days, with only about one-quarter of employees saying they still get them. But if you have the time (you may have to work a minimum number of years to be eligible) and opportunity to take a job that offers one, it could still be worth pursuing.
Government jobs and companies with strong unions are the first place to look, but some big-name companies still offer pensions too.
3. Consider a reverse mortgage
This is still a mortgage — on your house — but the money is flowing in the other direction, to you. In effect, you are borrowing money and using your home as security.
Reverse mortgages can be structured in different ways, including as monthly payments, a lump sum or a line of credit. You don’t have to repay the loan until you leave the home. And if you die before then, the house will be sold to pay it off.
They’re not right for everyone, but a reverse mortgage might provide a steady source of income if you have a lot of home equity and don’t plan to leave the house to family. You have to be at least age 62 to take a reverse mortgage.
4. Look into annuities
Annuities are basically investments made through an insurance company. They come in a few flavors: immediate, deferred and variable.
With an immediate annuity, you turn over a lump sum of cash to the insurance company. In return, you receive monthly income, which may be paid out for either a fixed number of years, the rest of your life or the lives of you and your spouse, depending on the annuity plan.
A deferred annuity works like a certificate of deposit from a bank. The money you pay in earns interest, and you get paid back at a future date, as you would with a matured CD.
A variable annuity works most like a mutual fund; your money may be used to invest in stocks, bonds or a mix of the two. One advantage over investing that money directly is tax deferment.
However, always look at the costs involved in any type of annuity.
5. Build a bond ladder
The idea of bond laddering is to divide up the money you’d like to invest in bonds and stagger it across different time frames so that you can enjoy a range of interest rates while creating predictable income.
In the past, Money Talks News founder Stacy Johnson has explained laddering — and a similar approach known as a “barbell strategy” — as follows:
If you need more income, create a bond ladder or use a barbell strategy. “Barbell” refers to having some money in really short-term bonds so you’ve always got something coming due, then having some in longer-term bonds or funds that pay higher rates. “Laddering” refers to having bonds in various maturities, like steps on a ladder, that accomplishes the same thing.
Each time one of your bonds matures, look at current yields. Then, decide how to reinvest the money from that step or “rung” — either in bonds or elsewhere.
6. Use the 4 percent rule
This isn’t an investment strategy so much as a withdrawal strategy, squarely aimed at ensuring consistent income without leaving you short in your later years.
A popular rule of thumb is to withdraw 4 percent of your nest egg in your first year of retirement, and then hold to that amount — adjusted for inflation each year — to make it last the rest of your life.
The strategy is not foolproof. The practicality of living on that amount depends largely on the size of your nest egg entering retirement, and the strength of your portfolio.
You can’t control the economy, but you can look at the math for a 4 percent withdrawal and start tucking away more now to achieve a realistic number later.
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