While retirement provides freedom from employers and the workplace, it might also mean living on a fixed income derived from your savings. If you don't want to run out of money prematurely, you must adopt strategies to ensure your retirement savings last or even grow. Everyone's financial situation and retirement goals are different, so each person's retirement income strategy will vary.
Even if you have a substantial amount of money saved, you should safeguard and maximize your income during retirement. A popular strategy is the bucket approach. Also known as the time segmentation strategy, the bucket approach establishes different accounts or "buckets" for different levels of spending in different periods.
One bucket could be money needed in the short term, which might be held in cash. You could also invest money that you will need in the future in high-return (and perhaps high-risk) opportunities. In retirement, you can pull your year-to-year income from the short-term bucket while earnings from your long-term bucket continue to replenish spent funds at specified intervals or set account balance thresholds.
Most retirement income plans tend to be unpredictable, as you cannot know how long the money will last or how long you will live. That is what makes an annuity appealing. An annuity is a contract signed with an insurance company. You pay them a predetermined amount of money, and they send you a guaranteed monthly amount for life.
Annuities come in several categories, including immediate and deferred annuities. In immediate annuities, you give the company a lump sum, and they immediately start sending you checks. In deferred annuities, the payments typically don't' begin for several years.
Different types of savings are taxed in different ways, and understanding how this works might help you hold on to more of your retirement money. For example, you pay regular taxes on tax-deferred retirement distributions but no taxes on Roth 401(k) and Roth IRA retirement distributions (if you are at least 59.5 years old and have held the accounts for at least five years).
Knowing your income tax bracket can also help you reduce your yearly taxes. As your income bracket changes, so does the level of taxation. For example, turning to your Roth savings as your income rises and you approach the top range of your income tax bracket may be a good strategy. You could opt for a Roth conversion by changing some of your tax-deferred IRA savings into Roth savings.
With the above Roth conversion strategy, you will also owe no tax even if you decide to change your distributions later. Also, the changes won't affect your overall IRA savings. However, you must also take the required minimum distributions once you reach 72 years or older because you might incur a penalty if you don't make enough withdrawals from your Roth savings each year.
Finally, after retirement, you can continue working part-time to supplement your savings. This can help you avoid running out of money prematurely. Look for alternative ways to make money, such as investing in a local business or renting properties. While this saves you from dipping into your retirement kitty until much later, remember that these alternative income sources come with tax obligations.
