7 Ways to Lower Your Retirement Income Risk

These are great investing strategies for retirement.

No longer can retirees depend on a pension after working for decades for the same company. While Social Security is available to most individuals over age 62, the payments rarely allow retirees to continue with their preretirement lifestyle. In 2019, the maximum Social Security benefit for a 62-year-old is $2,209 per month, while the highest amount a 70-year-old can collect is $3,770. These statistics underscore the importance of saving for retirement and supplementing Social Security benefits. For those who are in or nearing retirement, there are ways to improve retirement income from annuities to portfolio withdrawal strategies. The safest investments for seniors include well-known ideas as well as other retirement investments and strategies that may surprise you.

Annuities combat sequence of return risk.

A variable annuity with a guaranteed lifetime withdrawal benefit can counteract the risk of a down market concurrent with the beginning of retirement, says David Stone, founder and CEO at RetireOne. "Our research has shown that you can flip 15 years of returns from retiring during a recession to retiring during an upmarket and completely change your outcome. The initial positive returns would offset the withdrawals and potentially grow the assets before the negative returns begin to impact the investment," Stone says. When selecting the best annuity for you, it's important to work with a trusted financial advisor or buy one from a known low-fee financial firm such as Vanguard. Stone recommends choosing a low-cost, commission-free variable annuity, with no surrender charges.

Lower your investment risk with dividends.

"In today's low interest rate environment, I often see retirees making their portfolios too safe where they can unwittingly set themselves up for inflation risk," says Ryan Peckham, an assistant professor at the University of Texas at Permian Basin. Inflation risk can far outweigh the risk of investment volatility. To offset the risk of inflation curtailing a retiree's purchasing power, dividend-paying stocks with a history of increasing their payments are among the best investments for retirement income. Peckham suggests AT&T (ticker: T), currently paying 5.5% and Johnson & Johnson (JNJ), with a 2.9% dividend. For investors seeking a dividend aristocrat fund, the Vanguard Dividend Appreciation ETF (VIG) has a 30-day yield of 1.8%, with a low 0.06% expense ratio.

Protect income with a variable withdrawal rate.

In contrast with a fixed-percentage withdrawal rate in retirement, withdrawal rates should change based upon investment performance, says Brandon Renfro, an assistant professor and financial planner in Hallsville, Texas. He suggests putting in a variable withdrawal plan in place before retirement. This strategy adjusts the portfolio income withdrawal rate to market returns. For example, a retiree might choose a 4% baseline withdrawal rate, with 2% flexibility. If the portfolio value drops by a predetermined percent, the retiree decreases the withdrawals by 2% that year. Should the portfolio increase by a predetermined amount, the retiree could increase withdrawals by 2%. This type of strategy can decrease the likelihood of outlasting one's assets.

Cut retirement income risk with the bucket strategy.

Longevity risk, the possibility of outliving one's money is the scariest retirement income risk. But fear of volatility causes many investors to shy away from equities and growth investments, says David Edwards, president at Heron Wealth in New York. Edward's bucket strategy apportions 60% to stocks and commodities, 30% to government and corporate bonds and 10% to short-term cash securities. When rebalancing during a stock market advance, the excess from the stock bucket goes into the fixed bucket. While the excess in the bond bucket goes into the cash bucket. This works out to roughly one year's worth of retirement income in the cash bucket and four years of income in the fixed bucket. Cash flow distributions initiate first from the income bucket and secondarily from the fixed bucket.

Maximize Social Security benefits to increase retirement income.

Josh Bennett, CEO of Vincere Wealth Management in San Francisco, advises clients to optimize Social Security benefits. There are countless ways to increase Social Security payments as well as books and calculators to help get the highest Social Security payout. Several strategies to increase your Social Security payments include working for at least 35 years, as benefits are calculated on your years of top earnings. One important tip: Claim later since Social Security benefit payments increase approximately 8% annually up until age 70. Understand that working while claiming benefits can reduce Social Security payments. This might be a task to turn over to a qualified financial professional, as calculations and combinations can get tricky, fast.

Include real estate for best retirement investments.

Real estate tends to appreciate and protect against inflation. Although owning rental real estate offers tax benefits and an income stream, there are other ways to capture the benefits of real estate investing. "Real estate investment trusts are a way to generate an income stream that can grow over time, offsetting inflation and protecting your buying power. Just be sure to hold real estate investment trusts, known as REITs in a tax-advantaged account such as a 401(k) or IRA," says Greg McBride, a chief financial analyst at Bankrate.com. Buying a REIT like the Fidelity MSCI Real Estate ETF (FREL) is as easy as purchasing a mutual or exchange-traded fund on any investing portal like Schwab, E-Trade, Fidelity or Vanguard.

Sell option contracts on existing stocks for retirement income.

To generate cash flow from an existing portfolio, a retiree might sell options on their existing stocks, says Jake Falcon, CEO at Falcon Wealth Advisors. A call option is a contract giving the buyer the right, but not the obligation, to buy a predetermined amount of a security at a specific price, within an explicit time period. The call writer or seller receives a payment or premium from the option buyer. If the security price reaches the strike price written into the contract, the buyer can exercise the right to purchase the stock. If the security never reaches the strike price, the call writer keeps the option premium and the stock. This strategy is best used in conjunction with experienced financial advisors or by well-versed investors.

Know these strategies to lower risks to your retirement income:

-- Annuities combat sequence of return risk.

-- Lower your investment risk with dividends.

-- Protect income with a variable withdrawal rate.

-- Cut retirement income risk with the bucket strategy.

-- Maximize Social Security benefits to increase retirement income.

-- Include real estate for best retirement investments.

-- Sell option contracts on existing stocks for retirement income.