Who says you have to live on a fixed income in retirement? Sure, your Social Security checks might be fixed for each year, but they're likely to be increased at least a little in many or most years, to account for inflation.
There are lots of other ways that your retirement income can increase -- often with you making it happen. Here's a look at three things that you can do to boost your retirement income.
Two hands are shown, writing the words more income on an index card.
Image source: Getty Images.
No. 1: Save more aggressively, and invest effectively
First, a perhaps-obvious strategy: Sock away more money and be sure you're investing it effectively. You might think that, say, $5,000 per year in your retirement account is enough, but unless you've run the numbers, you may be undersaving by a lot. Much depends, too, on howlong you'll be investing for. The earlier you start, the less painful it will likely be. Check out the tables below. The first one shows the power of starting early.
Growing at 8% For
$10,000 Invested Annually
20 years
$494,229
21 years
$544,568
22 years
$598,933
23 years
$657,648
24 years
$721,059
25 years
$789,544
26 years
$863,508
27 years
$943,388
28 years
$1.0 million
29 years
$1.1 million
30 years
$1.2 million
Calculations by author.
Imagine that you're about 25 years from retiring, but you put off starting to save and invest in earnest for five years. Now look at the table above, and you'll see that if you were socking away $10,000 annually, you'd have amassed nearly $500,000 over the 20 years, but had your money had 25 years to grow, you'd have nearly $790,000 -- $290,000 more!
Next, think about how much you can manage to save and invest annually. The next table shows what a difference there is between different savings rates:
Growing at 8% For
$5,000 Invested Annually
$10,000 Invested Annually
$15,000 Invested Annually
10 years
$78,227
$156,455
$234,682
15 years
$146,621
$293,243
$439,864
20 years
$247,115
$494,229
$741,344
25 years
$394,772
$789,544
$1.2 million
30 years
$611,729
$1.2 million
$1.8 million
Calculations by author.
Finally, note that the tables above assume an 8% annual growth rate. Over many decades, the stock market has averaged annual gains of close to 10%, but you can't expect that, so an 8% rate is a more conservative assumption. Be sure you're aiming for solid returns in your investments, such as those you could get over the long term from a simple, low-fee broad-market index fund. You might average 10% with that, or if you add some carefully chosen individual stocks to your portfolio, that might juice your returns. The table below illustrates what a difference your money's growth rate can make, showing what annual investments of $10,000 can grow to:
Growing For
Growing at 4%
Growing at 8%
Growing at 10%
15 years
$208,245
$293,243
$349,497
20 years
$309,692
$494,229
$630,025
25 years
$433,117
$789,544
$1.1 million
30 years
$583,283
$1.2 million
$1.8 million
Calculations by author.
A yellow road sign is shown, and on it is the question what's your plan for retirement?
Image source: Getty Images.
No. 2: Make the most of retirement accounts
Another way to have more money in retirement is to be strategic about your retirement accounts. For starters, if your workplace offers a 401(k) plan, participate in it -- at least enough so that you max out any available matching funds from your employer, as that's free money. Take advantage of IRAs, too -- traditional and/or Roth.
With a traditional IRA or 401(k), you contribute pre-tax money, reducing your taxable income for the year, and thereby reducing your taxes, too. (Taxable income of $70,000 and a $6,000 contribution? Your taxable income drops to $64,000 for the year.) The money grows in your account, and when you withdraw it in retirement, it's taxed at your ordinary income tax rate at the time -- which is often lower than your current rate.
With a Roth IRA or 401(k) (employers are increasingly offering Roth 401(k) accounts), you contribute post-tax money that doesn't reduce your taxable income at all in the contribution year. (Taxable income of $70,000 and a $6,000 contribution? Your taxable income remains $70,000 for the year.) Here's why Roth accounts are well worth considering: Your money accumulates and grows in your account until you withdraw it in retirement -- tax-free. For 2019, the IRA contribution limit is $6,000 -- plus $1,000 for those 50 or older. The contribution limits for 401(k)s, meanwhile, are much higher -- $19,000 for 2019, plus $5,000 for those aged 50 and older. If you're 50 or older, take advantage of those extra allowed contributions -- they're called "catch-up" contributions because they can help you catch up in your savings to where you want or need to be.
No. 3: Work a few more years
Finally, this strategy may seem like a drag, but it's powerful and worth considering: Work a few more years than you had planned or hoped to. The benefits are many:
It will make your retirement shorter by a few years, so your nest egg will have fewer years in which to support you.
It will give you a few more years in which you can sock money away into retirement accounts.
It can keep you on your employer's healthcare plan longer, helping you spend less on doctors, drugs, and other healthcare costs.
There are lots of other ways to increase your retirement income, such as buying an annuity that increases payments over time to keep up with inflation or stocking your portfolio with dividend payers that increase their payouts over time.
Spend a little time reviewing the strategies above and other ones, and see which ones you might want to act on. You probably have a lot more control over your future income than you think you do.
