When it comes to saving for retirement, maybe you’ve done everything right. You started early, maxed out your 401(k) plan, invested in a diversified portfolio and avoided costly mistakes, such as cashing out your retirement plan. Fantastic. But now comes the hard part: making sure you don’t outlive your money. So here are 5 strategies to generate income in retirement:
1. Put Your Money in Buckets
Money in the Soon bucket will be your source of income for the next 10 years. Smith recommends investing in a fixed annuity (not an immediate annuity, which locks you into monthly payments) or high-quality short-term bonds or bond funds. As the Now bucket is depleted, you withdraw money from the annuity or sell some of the fixed-income investments in the Soon bucket to replenish it.
The Now bucket holds what you’ll need in the short term. Money in the Soon bucket will be your source of income for the next 10 years. The assets in the Later bucket aren’t meant to be tapped for more than a decade into your retirement, so they may be invested more aggressively in stock funds, which provide greater growth potential, and alternative investments.
2. Manage Your Spending
To avoid running out of money during retirement, the standard rule has been to withdraw 4% from your nest egg in the first year of retirement and use the inflation rate as a guide to adjust withdrawals in subsequent years. For example, if you have $1 million, you can withdraw $40,000 in year one. If the inflation rate clocks in at 2% in year two, your withdrawal grows by 2%, to $40,800.
3. Building a Granny House
In California, government allows to build Accessory Dwelling Unit projects in your property area. This is another great way for retired people to generate income from renting of the SDU. Besides this is an investment which will surely add the value of the property.
The accessory dwelling units are not only for elderly people, but also for the nuclear families who often have guests in their house. The building has its separate bathroom and kitchen, so it’s very cozy.
4. Minimize Taxes
To get the most out of your retirement savings, you need to shield as much as possible from Uncle Sam. Fortunately, there are plenty of legal ways to lower your tax bill, but they require careful planning and a thorough understanding of how your different retirement accounts are taxed.
5. Manage Your Pension
At a time when defined-benefit plans are becoming as rare as typewriters, consider yourself fortunate if you have a traditional pension to manage. Even so, the decisions you make about how you take your pension payout could have a significant impact on the amount of income you receive.