Many aging adults fear the possibility of outliving their retirement. With a longer life expectancy, an increasing cost of living, and rising health care costs, running out of money is a legitimate concern.
While some retirees may enjoy simple part-time work to supplement their retirement income, working in any capacity just isn’t feasible for others. Fortunately, retirees may have more sources of income than they realize. Here are three unexpected ways you can generate more income when you’re retired.
Did you know that a life insurance policy could potentially provide extra income while you’re in retirement? Apart from the death benefit, a permanent life insurance policy also contains a cash value. The cash value is a savings account that is funded by a portion of your premiums. If you’re ever in a pinch, you can withdraw from the cash value account tax-free. If a withdrawal exceeds the amount in the cash-value account, it will be taxed in the highest tax bracket.
Note: The death benefit will be reduced by the total amount you withdraw.
If you need a source of recurring income, you can convert your life insurance policy into an income annuity by way of a 1035 exchange. The trade-off with this type of conversion is that you will lose your death benefit, but you will gain regular income for a specified number of years, perhaps even the rest of your life. You’ll have to pay taxes on a portion of your payouts, but the initial conversion is tax-free. Consider hiring a qualified insurance evaluator to review your policy and help you choose the best course of action.
Another strategy for generating extra income is to minimize taxes. Make sure you are itemizing all possible deductions. For example, under some circumstances, even the cost of living in a facility or hiring help at home may qualify as a medical deduction.
Credit cards can accumulate deductible expenses for tax returns. Some companies offer lists of yearly expenses in different categories. Brokerage houses also offer similar statements. Pharmacies give prescription lists. These resources can help you keep track of eligible deductions and keep your finances ready for tax season.
It’s also possible to minimize the taxes you pay on retirement accounts. If you have a lot of funds in traditional IRAs and 401(k) plans, consider taking withdrawals before you turn 70 ½ to avoid being pushed into a higher tax bracket by RMDs. You can also convert some of that money into a Roth IRA. The conversion will be taxed as ordinary income, but after 5 years, Roth contributions and earnings are generally tax-free. It’s important to consult with a tax professional to ensure withdrawals from tax-deferred accounts or large conversions don’t put you into a higher tax bracket.
As a senior citizen, you may qualify for various government benefits that can supplement your retirement income, help with healthcare costs, and even provide access to healthy, fresh food. To make sure you’re receiving all the benefits that you’re entitled to, visit http://www.benefitscheckup.org. This site helps older Americans discover federal and state assistance programs that they may be eligible for.
If you aren’t in immediate need, consider waiting to claim your Social Security benefits. Taking Social Security benefits early, at 62 years old, could result in a benefit reduction of up to 30%. If you have the means to wait until you’re 70 to claim your Social Security benefits, you could actually increase your benefit amount. Your benefit will increase by 8% each year that you wait to claim your benefits, between the age of full retirement (66 years old currently but rising to 67) and 70 years old.
Financing retirement has become increasingly difficult, and many seniors fear they won’t have enough funds to last as long as they do. If you’re worried about outliving your retirement income, sit down with a financial planner or tax professional to discuss how you can generate supplemental income without having to roll up your sleeves.
Have additional questions? As an experienced CPA who specializes in working with seniors, Marcia L Campbell is happy to assist you. Contact us at (951)686-3608 for more information.