2 Ways to Create Income During Retirement

Running out of money before you run out of life is the biggest fear many retirees face. For those without guaranteed pensions, it’s not just a night terror — it’s a realistic concern. In this article we’ll explore the income-based solutions to running low in retirement. To be realistic, a retirement backup plan needs to be entirely under your control. It can’t rely on good fortune, the benevolence of others, or external economic conditions.

1. Annuitizing

The first strategy for safely increasing retirement income is to purchase a fixed annuity. With single premium immediate annuity, you pay the insurance company a lump sum. Then, they then pay you a monthly income for life. There is no variability — no “upside,” or “downside” — in the income stream, other than perhaps inflation adjustments, if you pay for those. Fixed annuities are generally invested in bonds, yet they can pay more than the going rate on a typical bond fund. That is, they can substantially increase your investment income over what you could accomplish with your own investments, given a similar level of risk.

2. Tax-Mapping

Preparing for retirement isn’t just about accumulating enough savings. It’s critical to consider your overall tax picture, as well. You can’t always assume that you’ll have a lower tax rate in retirement. This especially applies if most of your funds come from a 401(k) plan, traditional IRA or other taxable income sources!

To help you keep more of your income in retirement, consider a strategy called tax mapping. This can involve shifting some beaten-down assets from tax-deferred status to tax-exempt status. Or, more generally, redirecting investments into tax-favored categories before retirement.

One easy way to tax-map is to convert holdings from a traditional IRA or a 401(k) into a tax-free vehicle. This involves being taxed on the early withdrawal of your IRA or 401(k) plan funds. However, it also means you won’t pay taxes later when you receive your tax-free income in retirement!