by Tim Giles

Created on: January 16, 2008

How to Maximize Your Retirement Income

I write this as one who is currently retired. My specific circumstances are: Social Security and defined benefit pension totaling $2,700 per month, essential expenses of $3,800 per month, and withdrawals from an IRA to make up the difference. While being retired suggests the opportunities for maximizing income are past, there are small actions that are productive.

1. Minimize Federal Income Tax
Withdrawals from an IRA are discretionary. I have been careful to keep my taxable income below the 25% bracket, which changes yearly but is $63,700 for 2007. I estimate my taxable income as soon as possible before year-end and adjust the withdrawals accordingly. My goal has been to get as close to the top as possible, reasoning that the tax rate will never be less than 15%.

However, this year I have realized the importance of the taxation of Social Security benefits. For provisional income (=total worldwide income, including tax-exempt income, plus half of your Social Security benefits) above $32,000 (married filing jointly), 50% of the Social Security is taxable. For provisional income above $44,000, the marginal taxable amount increases to 85%. The taxable rate up near $63,700 can then be as high as 33%, not 15%. Consequently, I have reduced my withdrawal rate so that only 58% of Social Security is taxable.

2. Investments
If your IRA is only adequate, you need to take more risks because you can't afford security. I would love to have a life annuity to relieve the pressure of investing in stocks. However, I know that in my advanced years my spending will be less: no car, smaller residence, no travel. I cannot afford, nor do I need, a level income at those advanced years. A temporary life annuity, one ceasing at 85, for example would be more suitable if available.

I invest in a combination of high income stocks such as mortgage Real Estate Investment Trusts and closed end bond funds, and small cap growth stocks. In down markets, I increase the income allocation.

The use of options, puts and calls, is a viable way to maximize retirement income. A LEAP (Long-term Equity Anticipation) is an option whose expiry is measured in years, not months. If you have confidence in a stock's long term performance, but are not a market timer, a LEAP call option can be very effective. Having a good sell discipline is essential for successful investing. I hate to sell a favorite stock that has not performed. I can ease the psychological pain by selling the

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