3 Key Decisions that Can Enhance Your Retirement Income
Do you know one thing worse than being on a fixed income in retirement? It is being on a fixed income that is not enough to fund a comfortable retirement. It is scrimping and not enjoying the time you intended to be carefree.
You cannot prepare for or plan for everything. There are decisions about funding your retirement that may be difficult in trying to think about decades into the future with only current information at hand. While lifestyle and career situations over time will bring about adjustments to your retirement funding plan, you should start out with three basic decisionsi.
1 Monthly Social Security income changes a lot based on the age at which you retire:
The amount of your social security income in retirement is in large part computed based on your 35 highest income years during your work life. The benefit amount can be added to or reduced based on other factors. A factor that reduces the amount of the monthly benefit is retiring before your FRA. If you wait until your FRA, Full Retirement Age, to file for benefits, you will receive your full benefit amount each month based on the 35 top income years calculation.
If you retire early, as early as age 62, your benefit amount will be reduced for each month you retire before your full retirement age. This reduction is monthly for your lifetime of benefits, every month until you leave this earth. On the flipside, if you wait until you are 70 years of age, every month after your FRA will result in an additional amount in monthly benefits. The age you file for benefits can be a tough decision, but the effects last a lifetime, so take care.
When you are considering other retirement funding plans like 401(k) or IRA plans, this should have a bearing on your retirement age decision. Contributing factors to the decision could be other savings and their growth, if retirement early will yield other income opportunities, or medical or other lifestyle issues.
2 Other retirement plans that you choose:
Keep in mind that you may have opportunities to set up more than one type of retirement account, and this could split your decision about taxation. Standard IRA and 401(k) accounts grow tax free from contributions that are also tax deductible. However, you will pay income tax at then current rates when you withdraw funds in retirement. Switching to or adding a Roth type account will flip these tax issues. You will make contributions in after-tax dollars to these accounts, and they also grow tax free. However, you will not have to pay federal income tax on withdrawals in retirement.
Consider your current life and work situations, income streams, and tax situation. Is deducting contributions now more important than not paying income tax on withdrawals in retirement? Can you have both account types or must you decide? If you can have both, determine your contribution levels within their limits based on your current tax situation if you need deductions.
3 How you invest your retirement savings:
Using online calculators or consulting with investment professionals can help you to compare different investment returns within your timeline. Knowing your tolerance for risk, you may need to get outside of it for some of your investments. As an example, choosing bonds with low but safe yields could result in losing two-thirds of your potential retirement income if you had chosen moderately higher risk investments.
Do the best you can and make changes when they are indicated:
Retirement planning is not a hard science, even though a lot of numbers are involved. Decisions will seem best when they were made but then not the best later. Just keep the goal in mind and do an annual assessment of your retirement plan to see if it is progressing as expected.