Retiring amid a potential recession could make anyone’s stomach turn, but fortunately, there are ways to maintain your spending levels no matter the economic outlook. With inflation at 40-year highs, interest rates climbing fast, and stocks seeing their worst first half since the 1920s, investors are right to feel concerned. From that perspective, let’s take a look at three of the most effective ways to support your nest egg in retirement and limit the possibility of ever running out of money.
1. Delay filing for Social Security benefits
Delayed Social Security credits are a really powerful tool for people who can afford to wait on filing. For every year you wait to claim Social Security, you’ll receive an 8% bump in benefits. What’s more, you’ll also receive annual inflation adjustments (commonly referred to as cost-of-living adjustments or COLA) to help cover any loss in purchasing power. This will obviously come in handy should the current inflationary environment stick around for longer than anticipated.
Social Security, for many retirees, acts as a minimum level of guaranteed income designed to cover basic living expenses. Unlike stock returns — which have the tendency to come and go — Social Security sticks around for the rest of your life. The longer you wait to file, the more you’ll ultimately receive, and the less you’ll need to rely on your investment portfolio to meet spending needs.
2. Pick up part-time work
Even small amounts of income in retirement — or the years leading up to it — can make a huge difference in the degree to which you need to rely on volatile investments. Part-time work can generate income levels in the $10,000 to $20,000 range, which, when combined with Social Security, can go a very long way in reducing the stress on your portfolio.
In an overly simplified example, imagine that you’re able to collect $30,000 in annual Social Security income and manage to add $20,000 in part-time income. Also, assume your spending needs for your first year of retirement amount to $70,000.
If you were to opt-out of part-time work, the 4% rule for a 30-year retirement would indicate a personal savings goal of $1,000,000 ($40,000 divided by 4%). By adding part-time work, you’re able to reduce your portfolio withdrawal requirement by half and would theoretically be able to retire with only $500,000.
Needless to say, small amounts of earned income matter more than they might appear.
3. Look into certain annuities
This applies to those without a pension or without meaningful Social Security benefits, but adding a single-premium annuity can act as valuable insurance if you’re facing limited income in retirement. If you have all of your money in stocks, you might consider sectioning off a portion of assets to annuitize, which can help raise your guaranteed income floor in retirement.
Some annuities are prohibitively expensive, and others come laden with complicated riders or unnecessary fees. This might convince a retiree with a portfolio of all stocks and bonds to avoid annuities entirely. However, single-premium annuities can make sense if you’re worried about market volatility over the next decade or have concerns about longevity risk (the risk of outliving your money in retirement).
Looking to the decade ahead
Like any retiree, all you can do is make reasonable predictions about how the future might play out and try to position yourself as best as possible. By considering different economic outcomes as it relates to your financial plan for the next decade, you’ll be far better off than if you were to make all-or-nothing bets on specific outcomes. Assuming we’re in for 10 years of outperformance is probably not a great call, but also assuming we’re in for unprecedented economic calamity is also far from certain. Take a balanced approach and work on the factors you can control.
The $18,984 Social Security bonus most retirees completely overlook
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