11 Ways to Get More Money in Retirement
These simple steps can increase your savings dramatically
(This article appeared previously on MarketWatch.com.)
I don't think you'll find many people who would turn down the opportunity to have more money during their retirement.
Maybe you think this is an elusive dream, but most people can achieve it.
Here are 11 ways:
1. Delay Retirement
One of the most popular articles I ever wrote at MarketWatch.com was called “How to double your income in 5 years.” This claim is based on the results of a seemingly simple decision: Postpone retirement for a few years.
If you work an extra five years before you retire, several good things happen. First, you have five more years of savings, possibly when you are at or near the peak of your earning power. Second, you add five more years of potential market growth. Third, your portfolio has five fewer years in which it must support you; when you retire, you can safely withdraw at a higher rate.
(MORE: Why Boomers Are Working Longer)
It isn't at all unrealistic to think that these factors could combine to double your annual retirement income.
2. Postpone Social Security
One surefire way to have more money in retirement is to get bigger checks (actually, they are now electronic deposits) from Social Security. I waited until age 70 to start collecting benefits. This means I have 32 percent more than if I had begun claiming at 66 and about 76 percent more than if I had started at 62.
Postponing Social Security could be beneficial to your spouse as well. If you die first, your spouse's survivor benefits will be based on yours — and if yours are larger, then your surviving spouse's will be bigger, too. (See also: How to get more money from Social Security)
3. Conserve Your Portfolio
Take less money out of your portfolio in retirement and you could wind up with more in the long run. This sounds counterintuitive, but it works.
I tracked a hypothetical case of someone who retired in 1970 and withdrew either 4 percent every year or 5 percent. Obviously if you take out 5 percent, you have more to spend in the first year. In this study, a 5 percent withdrawal would have provided more for each of the first 17 years.
But 4 percent distributions left more money in the portfolio each year. That, in turn, translated into considerably higher payouts in the later years of retirement.
A lower withdrawal rate also reduces your risk of running out of money. This strategy isn't going to work for everybody, but if you have saved enough money to live well on 4 percent payouts, you (and your heirs) will eventually have more money to spend and give. To see how this might work, read: Do you have enough money to retire?
4. Minimize Management Fees
Anything you can do to increase your returns should leave you with more money for retirement. Most investors pay unnecessarily high expenses. Even when they are carefully hidden, mutual funds' expenses inevitably take money away from you.
All funds are not created equal when it comes to operational expenses and the costs of portfolio turnover. This information (easy to obtain for any mutual fund) can make a big long-term difference in your returns.
The simple decision to invest in index funds tackles these two troublesome expense areas and can give you an extra 1 percent (or more) annual return from owning essentially similar assets. In taxable accounts, index funds give you an extra bonus: Lower turnover means fewer capital gains and thus lower tax bills.
5. Add More Low-Risk Investments
Settling for lower returns and lower risks in retirement can net you more money. We all know that stocks have higher long-term returns than bonds. But stocks have the potential to leave investors with severe losses, too.
To learn the real-life impact, I compared two retirement portfolios, each of which paid out 5 percent each year adjusted for inflation. The higher-paying all-equity portfolio (the S&P 500 Index) ran out of money in 23 years. But a portfolio made up of 40 percent lower-yielding bond funds and 60 percent of properly diversified equity funds was able to keep producing inflation-adjusted distributions for 44 years. Here's a clear case in which less (lower returns and lower risks) turns out to be more.
6. But Don't Be Too Conservative
However, sometimes more is indeed more. When investors are too conservative, they leave money on the table with only minimal benefits to show for it.
When I tracked the results of two retirement portfolios that made inflation-adjusted 4 percent distributions, I found an enormous difference between having 30 percent in equities versus 40 percent. After 44 years, the more conservative 30 percent portfolio was worth $1.7 million; the 40-percent-in-stocks version was worth nearly $5.1 million.
Interesting point: You'd never imagine such a big difference from just the annual return figures: 8.3 percent for the 30 percent allocation versus 8.9 percent for 40 percent.
7. Consider Annuities
Many people reach retirement age with inadequate savings and can't meet their needs by withdrawing the 4 percent to 5 percent that is often considered to be relatively safe. But they're not totally out of luck.
If you're in that situation, depending on your age, you may be able to get a 6 percent to 8 percent payout through an immediate life annuity. And if you buy an annuity from a low-cost provider, you may do even better than that.
8. Drop Underperforming Investments
Many investors can make more money with the stroke of a pen by getting out of relatively unproductive investments in asset classes that historically underperform.
If you have a significant part of your portfolio in gold, commodities, penny stocks or technology stocks, you're probably not making the money you could and should. The sooner you do a better job of investing, the sooner you are likely to have more money to save and spend.
I am not saying you will necessarily lose money in these investments. But for the past 50 years, they have underperformed the other asset classes that I recommend. If this describes you, what are you waiting for?
In 6 Steps to the Ultimate Retirement Portfolio, I show you where you're likely to get a better long-term deal with your money.
9. Withdraw From Taxable Accounts First
You will have more money to spend in retirement if you pay less in taxes. I've seen way too many retirees withdraw money from their tax-deferred money before they tap into their taxable accounts.
Granted, taxes can be complicated. But in most cases,(see your tax adviser if you're not sure), it makes sense to let tax-deferred accounts build up in value while you gradually liquidate taxable ones.
10. Be Frugal
Whether you're already retired or still working toward that goal, I feel safe in guaranteeing that you'll have more money to spend if you become a better shopper. If you haven't focused on this, you might be surprised at how easy it can be.
Of the hundreds of books on this topic, here are two I like: How to Retire the Cheapskate Way: The Ultimate Cheapskate's Guide to a Better, Earlier, Happier Retirement by Jeff Yeager and The Lazy Couponer: How to Save $25,000 A year in Just 45 Minutes Per Week with No Stockpiling, No Item Tracking, and No Sales Chasing! by Jamie Chase.
11. Hire An Adviser
There is an old definition of insanity: Doing the same thing over and over while expecting the outcome to be different. If you’ve been trying unsuccessfully to do all of this on your own, you might consider buying some expert help.
An hourly adviser can help you put these ideas into practice in short order. You can find affordable help through the Garrett Financial Network, for instance. If you spend a little money on this, the advice you get could pay big dividends.
Paul Merriman is founder of Merriman Wealth Management, a Seattle-based investment advisory firm, and president of The Merriman Financial Education Foundation. Paul writes a weekly column for MarketWatch's The RetireMentors and records a weekly podcast, Sound Investing. He has authored numerous books on investing including Financial Fitness Forever, Live It Up Without Outliving Your Money and the new How To Invest series available for free at PaulMerriman.com. Follow Paul on Twitter @SavvyInvestorPM. Richard Buck contributed to this article.