How to Maximize Retirement Income
Here are some simple but helpful tips that could help you maximize your retirement income.
The key to a financially sound retirement is early planning and wise investment strategy.
Start Saving for Retirement Early
In order to take advantage of the interest compounding effect you should start saving early in your career. The sooner you start saving, the more you will benefit from interest compounding. Let’s assume that you and your twin brother started working at the age of 25 and plan to retire at the age of 65. You started investing immediately $10,000 annually, but your twin brother started saving the same annual amount 5 years later, at the age of 30. Assuming a nominal investment appreciation of 5% per year, your nest egg at the age of 65 would be $1.34M, while your brother would have only $1M saved by then. Even if you live on a tight budget, start saving a small amount early in your career towards your retirement. Let the time value of money work for you.
Initial saving With a Lump Sum
If a lump sum of money is available to you, you should consider investing it and using it as the base for your retirement fund. For example, consider investing your Wedding gifts of cash to enhance the effect of compounding interest. Let’s suppose that the 2 brothers of the example above had both started investing at the age of 25, but one put in an initial lump sum of $100,000 and invested $10,000 annually thereafter till his retirement, while his brother was able to invest only $10,000 annually. In this case, the first brother would enjoy a $2M retirement package, while his brother would have only $1.34M saved by his retirement age of 65.
Determine your Risk Taking threshold
It is very important to determine early in the game how much risk you are willing to take with your investments. Most people are risk averse and do not enjoy the capital appreciation potential of moderate to high risk investments. However, a mixed investment approach could easily yield an average annual return of 6% to 8%, as compared with a 1%-2% appreciation associated with “safe” investments such as CDs and Cash. Using the example of the 2 brothers, if one of them is risk averse and invests his yearly $10,000 in a 1% CD, his retirement nest egg will accumulate to a mere $508K at the age of 65. His “Risk Taker” brother on the other hand, would enjoy a retirement package of $3.03M, if his portfolio’s average annual return is 8%.
Find the best IRA for you and maximize your employer 401K matching contribution
You should sort carefully through the many different types of IRAs available on the market. For example, the Spousal IRA allows for contributions for your non-working spouse to a separate IRA. The Education IRA allows you to make untaxed contributions of up to $2000 a year toward a program of higher education.
The Simplified Employee Pension IRA (SEP-IRA) and the Savings Incentive Match Plan for Employees (SIMPLE-IRA) allow employers to contribute to employee IRAs. Having an additional or matching contribution to your IRA or your qualified 401K retirement plan will increase the value of your total investment.
Conduct Investment Research
Do your own investment research and educate yourself on your investment options in order to make informed decisions. Get the most out of a financial consultant by doing your homework first. With your consultant’s insight and your own intelligence, you’ll be able to find the best strategies for maximizing your retirement income.
The Bottom Line
Having enough money to live comfortably when you retire isn’t enough for most people. It’s important to have a little extra so you can fulfill your life long dreams and prepare for unexpected expenses during your retirement. Invest wisely, take moderate investment risks early in your career, maximize your 401K and IRA tax free accounts, and try to add lump sum cash to your retirement accounts whenever possible. If you do so, your retirement will be sweet and risk free.