Aaron Cirksena is the founder and CEO of MDRN Capital.
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In an ideal world, retirees would enter their golden years with all of the wealth they needed to live out the rest of their lives in comfort. Yet this world is often not ideal, especially when it comes to retirement planning.
Many scenarios can negatively affect retirement savings, from unexpected medical expenses to major market downturns. One of the most common threats to financial security during retirement years is outliving retirement savings, which is something that more than 50% of today’s retirees fear they will experience.
The good news is retirement doesn’t need to be the end of wealth building. When a retiree’s financial outlook changes for the worse, several steps can be taken to increase wealth.
Here are 10 approaches to building wealth that are promising of positive results for retirement.
1. Consider low-cost investment options.
If you have money in a retirement account, the manager of that account is charging you a fee. While 1% is standard, rates vary. Of course, finding an option that charges a lower fee will save you money that can add up over time.
Index funds, which are passive investments, typically charge fees that are less than one-tenth of a percent. Fixed index annuities are an attractive option to replace traditional “fixed income” investments and can provide you with a portion of the upside of the market while protecting the principal that is invested, which is designed to provide a guaranteed stream of income after a certain period of time. They can also be utilized with no fees.
2. Maximize tax efficiency.
If you have retirement funds in a traditional IRA or 401(k), you face required minimum distributions (RMDs) that are taxed as ordinary income. Certain withdrawal strategies—such as delaying, spreading out or donating withdrawals—can minimize your tax burden, as can looking into Roth conversion strategies. If you have a mix of accounts and some offer tax-free withdrawals, you can look to tap into those accounts to avoid pushing yourself into higher tax brackets.
3. Regularly update your risk strategy.
Your risk strategy defines your investment allocations. When you are younger, you generally have a more aggressive strategy and allow for greater risk because you have more time to recover if you experience losses.
After you enter retirement, however, losses are more difficult to recover from, so many people shift to a more conservative strategy to protect their principal. Conversely, if you find you need to build wealth, you may shift temporarily toward a more aggressive strategy to bump up your holdings.
4. Keep investing.
Retirement is commonly thought of as the time when you stop putting money in and start taking money out, but retirement provides freedom from work obligations and can give you more time to focus on investing. Exploring new avenues for investing can uncover opportunities for leveraging what you’ve accumulated for promising investment opportunities.
5. Focus on downsizing debt.
A mortgage or other debt can be a big drain on your retirement savings, especially when the interest you are paying is higher than the interest you are earning. If you were not able to control debt before retirement, make it a high priority in the early years after you retire. Putting off discretionary spending to reduce debt will reduce monthly expenses and leave more in accounts to earn interest.
6. Consider working part time.
Most people envision retirement as the season when they are completely free from the demands of the work world. However, transitioning from full-time work to part-time work can lower your stress levels while also providing income that can be used for wealth building.
Taking a position as a consultant or adjunct professor, for example, can allow you to set your own schedule and make additional money while leveraging the insights you learned in your career. Monetizing your hobbies is another approach to gaining income through part-time work.
7. Look for passive-income opportunities.
Passive income is earned with no active involvement, such as the rent you collect from rental properties, for example. Royalties from intellectual property, such as writing or music, are another example.
If you travel during retirement, renting your home can serve as an opportunity to generate passive income. Or, if you have considerable savings, peer-to-peer lending is another possibility.
8. Maximize your Social Security.
Most of the steps you can take to increase your Social Security payments occur prior to retirement, including working longer and earning more. Delaying your benefits, however, is something you can do post-retirement to increase the amount you receive.
Delaying benefits entitles you to an additional 8% per year, meaning that delaying from age 67 to age 70 entitles you to 124% of your full benefits. While this is not always a smart strategy, it is something that should potentially be explored.
9. Consult with excellent advisors.
If you have looked to investment advisors to prepare you for retirement, don’t stop drawing from their wisdom after you retire. An excellent advisor can guide you in many of the opportunities you have for increasing wealth after you retire, especially if you are looking to optimize your investment accounts.
10. Never stop learning.
Financial markets are always evolving, so committing to staying informed will help ensure you know when it’s time to review your strategy or explore new opportunities. If your approach to retirement investing is “set it and forget it,” you will definitely miss out on opportunities to build wealth in your retirement.
Financial setbacks can happen in any phase of life, but if they strike after retirement, resist the temptation to see them as irrevocable. Remember, you are never too old to build wealth.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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