Once you retire, how you generate income changes. Since you’re no longer earning a salary, you must make other investment choices to keep the money coming in. This typically means a combination of additional investments and optimizing those you’ve been paying into during your career.
With so many options, it’s easier than you may think to make a wrong decision.
When looking at your choices for retirement income, here are three ways to avoid making costly mistakes.
Avoid variable and immediate annuities
Buying an annuity ties up money for the rest of your life, and certain types have drawbacks according to Kiplinger. You have the stability of regular income, but it usually comes at a price.
A variable annuity provides returns based on underlying investments connected to the account, but they often have an assortment of fees that can get as high as 4% per year. The complexity of their fee structure makes them expensive.
An immediate annuity requires you to hand over a lump sum of money in order to receive a guaranteed payout that can last the rest of your life. However, once that money is placed in the annuity you can’t get access to it outside of the payout. If there’s an emergency, that money is tied up. Additionally, interest rates are low enough right now that you won’t make that much on your investment.
Wait to draw on Social Security
Although you’re able to start collecting Social Security as early as 62, the longer you wait, the closer you’ll be to receiving the maximum amount of income.
According to Investopedia, full retirement occurs between 66 and 67 based on your birth year, so waiting until then increases your Social Security income. To collect the maximum benefits though, filing for Social Security at 70 is ideal.
Minimize tax impact of 401(k) distributions
If you have a 401(k) going into retirement, deciding when to begin taking distributions can impact how much income tax you owe on each of them. You technically don’t have to start taking a distribution until 72, but if you retire before you turn 55, you’ll pay a penalty to withdraw, according to U.S. News & World Report.
If you’re concerned about income levels, you can look at the tax impact of making 401(k) withdrawals at different ages with the help of a financial planner or an accountant. They may also advise you to move your 401(k) into an IRA to help save you money on fees and overall investment costs.
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