It is no secret that when you retire, your income is likely to go down compared to when you were working full time.  There are very few situations in which someone’s income remains the same in retirement and it almost never increases.  So, the big question is, how do you cover your ongoing expenses and maintain your lifestyle in retirement when your income is less than what you had been earning?  I believe there are 5 ways to improve your cash flow in retirement:

1. Go back to work.
2. Take funds from savings or retirement accounts.
3. Start receiving your Social Security income sooner rather than later.
4. Reduce your spending/ cut out monthly expenses.
5. Utilize some of your home equity.

Let’s breakdown each one of these options a bit more to see what the pros and cons are for each of these options.

First, the option of going back to work can be the fastest way to improve cash flow.  There are many ways to earn an income in retirement to include part time work.  As a matter of fact, there are many seniors who drive for Uber and Lift part time as an example.  However, not everyone is physically or mentally able to work in retirement and that might in fact be the reason that you are retired.  Or you may simply have zero interest in working ever again.  So, this is not an ideal option for many people in retirement, but it is something that you can possibly consider.

The second option is to draw funds out from your savings or retirement accounts.  Ultimately, I call this spending down your nest egg. There are many factors to consider when taking money out of your nest egg and because I am not a financial advisor or tax advisor, I am not qualified to go over all of them but here are a few to consider.  If you take funds out of a retirement account prior to 59 ½ years old, generally there are penalties unless you qualify for an exception.  Additionally, when you take money out of a retirement account (other than a Roth IRA or Roth 401k), there are tax consequences as well.  By taking funds out, this will generally increase your adjusted gross income, possibly pushing you into a higher tax bracket and you will likely be required to pay ordinary income taxes on the money you take out as well.  When you turn 72, you will be required to start taking funds from your retirement accounts. This is called required minimum distributions (RMDs).

The third option to consider is to start receiving your Social Security income as early as age 62.   However, your Social Security benefits will increase if you delay taking payments until your full retirement age.  For every your you delay claiming your benefits, you get an 8% increase until age 70.  This means that you could get a 24% higher monthly benefit if you delay claiming until age 70. However, there are certainly circumstances when you cannot delay claiming Social Security, or it financially makes sense to start claiming benefits sooner rather than later.  This is a topic that you will want to discuss with your financial advisor to understand all your options, to include the pros and cons of delaying or claiming early. 

The fourth option is relatively straightforward, which is to reduce your spending.  This is the simplest option but can be the most difficult option to achieve.  The reality is that many of our monthly expenses that we might be able to cut out are relatively small.  These are expenses like internet, cell phone, cable TV, Netflix, HBO, Hulu, etc.  These costs by themselves are generally not that much and cutting any of these out will barely make any change to your overall budget but can have a dramatic impact on your happiness and have a detrimental impact to lifestyle.  The other monthly expenses like insurance, food, gas, and travel are more expensive but are much harder to cut out as well.  The largest expense and one that many retirees (who are over the age of 62 and have a significant amount of equity in their home) can possibly look to eliminate, is their monthly mortgage payment.  This could possibly be achieved through a home equity conversion mortgage which does not require monthly mortgage payments (you must still pay your property taxes, homeowner’s insurance, HOA dues and maintain your home).

The fifth and last option is to utilize some of your home equity.  This is not an option for people who rent but for those who own a home and have a significant amount of home equity, this might be a great option to consider.  One of the reasons to use home equity is because the proceeds of a mortgage are free of any income taxes (a mortgage is loan and loan proceeds are not considered income).  Therefore, this is one of the most efficient strategies to improve cash flow.  The challenge with doing a cash out refinance or taking out a home equity loan or a home equity line of credit (HELOC), is that you will likely increase your monthly expenses by taking out a larger mortgage.  Therefore, this strategy can help you to access money but could increase your expenses.  This is why the Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, can be considered the best of all options because you can access cash and not incur a monthly mortgage payment providing the best bag for your buck. 

These 5 strategies might not be the only options to improve cash flow in retirement, but I have found that almost every option will fall into 1 of these 5 categories.  The reality is this, research has shown that people who save will continue to save and people who spend will continue to spend.  For people who are spenders, these options will become very critical to consider and should be considered earlier in retirement versus later.  Please know that none of the information in this article is tax advice or financial planning advice and you should consult your tax advisor or financial advisor.