3 Strategies that can help increase your retirement income in a low interest rate environment

Try to Enhance Any Annuity Income

If you’re currently receiving annuity income from TIAA Traditional Annuity and/or variable accounts, you can transfer among the accounts. With all the market volatility in the past few years, your income allocation – the percentage of income you’re receiving from different accounts – may have veered from what it was when you started withdrawing from TIAA and CREF accounts. You may want to check whether your annuity allocations should be adjusted to better meet your income needs. We recently announced that income for most variable annuity accounts increased for a second year in a row. It’s worth noting that TIAA Traditional Annuity will provide at least as much total income in 2011 as 2010.

To learn more about enhancing annuity income, contact us.

If you’re retired, you could be facing an unprecedented challenge in generating income. The same bank savings account or money market fund that offered 5% interest a decade ago is now offering 0.5%. It’s like taking a major pay cut.

But there are some simple ways that can help you offset this drop in income without taking a lot of risk. First, you can look for ways to cut expenses without reducing your quality of life; second, you can minimize taxes by shifting retirement payments; and third, you can diversify your portfolio into higher-yielding investments that are designed to keep risk under control.

Cut Expenses

Before you can figure out where to cut, write down your income and expenses by categories. Start with your fixed expenses, such as your mortgage, your property tax, medical costs, and insurance. Then list your variable expenses, such as food, clothing, and entertainment. Take the next step to create a detailed budget.

Where can you cut expenses without diminishing your quality of life? Start by replacing brand-name with cheaper generic prescription drugs. In all likelihood, your medical insurance doesn’t cover the total cost of your prescription drugs. Find out from your doctor whether you can substitute the generic drug without impacting therapeutic effectiveness. You may qualify for help from Medicare to pay the costs of Medicare prescription drug coverage. Get help controlling your medical and drug costs.

Another way to cut expenses is to consolidate debt and lower your interest rates. Write down all of your credit cards, the interest rate charged, and any outstanding balances. Pay off the cards with the highest rates first. Make the minimum payments on all but the highest interest-rate debt and use any extra money to pay down the highest-interest account. Easy ways to chop credit card debt.

Monitor your bank and mutual fund fees to see if you’re paying above-average charges. The TIAA-CREF Expense/Growth Calculator will show you the impact that sales charges and annual expenses have on your returns. Based on Morningstar data (Morningstar Direct, as of March 31, 2011), the expense ratio on all mutual fund products and variable annuity accounts managed by TIAA-CREF is generally less than half the mutual fund industry average.

Minimize Taxes 

If you have a Traditional IRA, you pay tax at the ordinary income tax rates upon distribution – in general, you must begin taking distributions at age 70½. For many people, this option is burdensome because the actual tax payment is due during a person’s retirement – a period of reduced income. 

Another option is the Roth IRA. Distributions from a Roth IRA are tax free as long as you’re over age 59½, and the account has existed for five years. In addition, you can leave the money in the account indefinitely and take distributions only when needed.

Because the Roth IRA has attractive tax benefits, consider converting your Traditional IRA to a Roth IRA. The conversion process only incurs a one-time tax payment and generally speaking, the younger you are, the more attractive it is to convert. Learn all about Roth IRA conversions.

Diversify Your Portfolio

As your income needs grow, consider shifting to investments that can provide current cash flow, such as municipal bonds, inflation-linked bonds, and income funds.

Muni Bonds. Traditionally, tax-free municipal bonds have been an ideal retirement vehicle. The yields on munis are generally lower because of their tax-free status. For example, suppose you’re in a combined 35% state and federal tax bracket, and a competing taxable investment offers a yield of 4%. An equivalent tax-free investment would have to offer only 2.6% to be equally attractive because you don’t pay taxes on income.

However, munis may have somewhat more risk than in recent years as state and municipal governments struggle to balance budgets. Credit risk has become a more significant concern, creating opportunity as municipal bond yields have soared in relation to taxable equivalents, such as U.S. Treasury bonds. To mitigate credit risk, diversification is imperative. Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income. Mutual funds, such as the TIAA-CREF Tax-Exempt Bond Fund (Retail Share Class), can provide diversification. The Fund intends to make distributions to shareholders that may be tax-exempt income, taxable ordinary income or capital gains.

It’s important to check with your tax advisor to determine your tax bracket and confirm whether you can receive tax-free income, based on where you live and the type of municipal bond investments that meet your financial needs.

Inflation-linked bonds. The U.S. Treasury offers investors an inflation hedge with Treasury Inflation-Protected Securities (TIPS). The CREF Inflation-Linked Bond Account, a variable annuity for retirement plan investors, and the TIAA-CREF Inflation-Linked Bond Fund invest primarily in U.S. Treasuries whose interest payments are adjusted for inflation.

Keep in mind that funds that invest in fixed income securities are not guaranteed and are subject to interest rate, inflation and credit risk.

Retirement Income Fund. If you want to simplify your approach to receiving more income, consider TIAA-CREF’s Lifecycle Retirement Income Fund, which seeks high total return over time through income, with a secondary emphasis on capital appreciation. Designed for investors who are already in or entering retirement, the fund currently invests in a diversified portfolio consisting of about 40% equity and 60% fixed income.

To discuss ways to increase your income, contact us.

Annuity account options are available through annuity contracts issued by TIAA or CREF. These contracts are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Payments from the variable annuity accounts are not guaranteed and will rise or fall based on investment performance. Mutual funds do not offer the range of income options available through annuities.

Past performance does not guarantee future results.

Any guarantees under annuities issued by TIAA are subject to TIAA's claims-paying ability. Payments from variable accounts will fluctuate based on investment performance.

Lifecycle funds share the risks associated with the types of securities held by each of the underlying funds in which they invest. In addition to the fees and expenses associated with the Lifecycle Funds, there is exposure to the fees and expenses associated with the underlying mutual funds as well.

TIAA-CREF products may be subject to market and other risk features. See the applicable product literature or visit tiaa-cref.org for details.

The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.

Investment products, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), New York, NY.

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