5 Ways to Increase Your Retirement Income Without Decreasing Your Lifestyle
I wish I could come up with another word for retirement. When a product is “retired” it’s usually because it is out of date and no longer useful. I don’t like the idea that I’m saving my money so I can stop being useful. If I could come up with a new name, it would be something that brought forward feelings of freedom, purpose, and fun. And then I would find a way to convey that those things are available now AND in the future. But for now, I’m stuck with the word retirement. So let’s redefine it.
Retirement is that period of time when you have enough income coming in to maintain your lifestyle forever, regardless of how you spend your time. There. Now we are on the same page.
So how can you increase your income? Here are 5 tips for changing your mindset, strategies, and the tools you use to create more sustainable income over your lifetime (and the generations to come!)
Focus on Income Creation, Not Just Net Worth
The biggest mistake I see people making is focusing exclusively on net worth. People often ask, “How much money do I need to retire?” And the answer isn’t as black and white as many pundits try to make it seem.
Here’s why: You could own 10 million dollars of real estate free and clear, and it might only generate enough returns to pay the taxes. How is that possible? Well if you bought vacant lots, they don’t generate income even though they increase in value. Maybe you have one multi-family unit in there (like an apartment complex) and it produces enough income to pay the property taxes on itself and all the lots. That’s a ten million dollar net worth producing no take home income for the owner.
Or maybe you have 1 million dollars in the stock market. Officially you are a millionaire, but if you go with conventional wisdom, you can safely spend about 3% of that each year if you want it to produce income through the ups and downs of any market, given what we have seen the market do historically, regardless of how you allocate your portfolio. A 3% withdrawal rate means you will be able to continue taking income for 30 years in 90-99% of the market scenarios that could occur. To translate: For every million dollars you save up, you can safely spend about 30,000 a year, if you are looking to take income over your potential lifespan. If you have more than 1 million dollars, multiply the number by .03 and there’s your safe income rate.
By changing your focus from net worth to income creation you will begin to look at the world from a totally different perspective. Income first, net worth second. Why? Because if you can take less money and create more income, you are more efficient and you can replace your earned income with passive income much sooner.
Create a Market Shock Absorber
We’ve all heard the phrase, “What goes up must come down.” And most of us have lived through a rough year in the stock market. Historically, the market has always trended upward, but it’s important to note it’s not always a smooth ride. If you are saving money, the times of market loss can be an opportunity to acquire new assets at reduced prices. This means you have more money earning for you when the market recovers. The opposite is true during retirement. If the market takes a loss and you withdraw money for income, you are compounding your losses. When the market recovers, if you are withdrawing for income, you are withdrawing some or all of the recovery, which means your portfolio might not be recovering at all. A series of losses can deplete your portfolio beyond the point of no return.
What can you do about that? Build a side fund that can act as a market shock absorber. This account must have guarantees – meaning it won’t take losses when you other assets do. People frequently want to do this with a high yield savings account, but remember, we just experienced more than a decade where rates were so low that the opportunity cost alone makes that inefficient and emotionally impossible.
The best place to build a market shock absorber is a whole life insurance contract that is funded for cash accumulation and flexibility. This is not the off the shelf product that insurance agents want to sell you. It is a policy structured specifically to create access to cash, premium flexibility, and optimized internal returns. Even though the return in a whole life insurance policy is typically lower than the stock market the cash accumulation is healthy. When used as a buffer, if done correctly (which means you have 8 years of after tax income sitting in the cash value of the whole life policy), you can increase your safe withdrawal rate to around 7% with the same likelihood of success most people have at a 3-4% withdrawal rate.
Here's how it works – when the market is down, you respond by discontinuing any withdrawals from your market based account. Take income from the cash value of your whole life insurance instead. Continue to do that until your market based portfolio recovers, then resume withdrawing from your investment portfolio. This shock absorber works for stocks, bonds, mutual funds, real estate, royalties and more.
Set Yourself Up to Create a Simulated Pension
If the idea of market volatility in retirement gives you the nervous sweats, there are other ways to increase your income when you retire. In fact, you can create income streams that are guaranteed for life, that feel just like having a pension. What do I mean by that? Imagine having a guaranteed paycheck, every month, for the rest of your life, no matter how long you live. Sounds to good to be true? Well, it isn’t.
When you get to retirement, you can move your assets into a tool called an income annuity. This tool is unlike most annuities. There is no growth, no upside, no phantom account. In fact, this is the simplest kind of annuity there is. You give the annuity company your money. In exchange, they guarantee you income forever. The payout rate is based on your age, your gender, and the interest rate environment. Once the rate is set, that’s the payout rate forever, no matter what happens in the stock market, in the economy, to the tax rates, or to political environments.
For a single 65 year old today the payout rate is between 7-7.5% payout. A one million dollar contribution would create 70-75,000 of income per year until death. That means you are spending your own money for the first 13-15 years. After that every paycheck is from the annuity company. That means if you live for 30 years after retiring you spent the annuity company’s money for 15-17 years! But what happens if you die early? Say two years in? At the time you open the annuity you can select to have your money refunded to a beneficiary if you die before you spent all of your contribution.
Acquire Assets That Produce Income Right Now
Why wait for retirement to create lifestyle income? By acquiring assets that produce income now, you can either increase your current lifestyle without adding pressure on yourself to earn more. Or, you can use the passive income to save up to acquire even more assets that produce even more income. You can create a system that build on itself.
This can include things like rental properties, private equity, private money lending or dividend-paying stocks. By investing in assets that produce regular income, you can ensure that you have money coming in each month to support your lifestyle now or grow your future lifestyle even faster.
When this method is employed with a concept we call the Private Reserve Strategy, you can also get your dollars earning in a safe savings vehicle, and then use an insurance company’s money to invest in other assets. By doing this you get the income from the asset you invest it, plus you keep your dollars earning on the compound growth scale. It’s a win-win.
Recognize There Are Investments and Savings Tools Beyond the Stock Market
I can’t tell you how many times someone tells me that they don’t want to make a financial decision “because they can earn a higher return in the stock market.” This myopic focus on rate of return can hinder income creation. Plus, if that’s your only measuring stick, there are plenty of investments outside of the stock market that can potentially produce much larger returns, so there’s some accidental hypocrisy there.
Every financial decision should be measured with at least two lenses. The first is, “how does this affect my accumulation rate (rate of return)?” The second is, “how does this affect my safe spending rate (withdrawal rate)?”
If you have never given any thought to how certain investments impact your spending rate because retirement seems a long way away, now is the time to start. By working with a retirement income specialist who can keep you focused on the end goal – income creation – you can eliminate inefficiencies that occur when the only thing you think about is rate of return.
Think about it this way. If you tried to play golf with a bag full of drivers, it would be very difficult to sink a putt. In fact, your score would probably be terrible. However, if you have a bag full of putters, your game will also be pretty awful. Getting to the green will take forever.
The right mix of clubs – Driver, Woods, Wedges, Putter - makes all the difference if you have mental strength and know how to play the game.
It's never too early or too late to start planning for your retirement, so start implementing these steps today. By shifting your focus, you can either retire with more income, retire earlier than expected, or live a more robust life today. And really, you can have all three. It’s not about taking more risk. It’s about a different perspective. It’s about introducing efficiency. Remember to consult with a financial advisor to make sure these steps are right for your specific situation. And if you need help finding one that thinks like this, feel free to reach out.