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Five Little-Known Tips Potentially Worth $339,231

First published on April 18, 2018 on the Motley Fool website

Did you know that the right retirement strategies could result in hundreds of thousands of dollars in additional retirement savings, as well as lower costs and higher cash flow after you retire? 

Some of these winning strategies are well-known. For instance, it's fairly common knowledge that many businesses offer senior discounts and that lower-fee investment products can save you money over the long run.

But there are some other great retirement tips and tricks that are not as well-known, and they can make the biggest difference. For example, there's a type of triple-tax-advantaged account that you can use for retirement savings and that could save you tens of thousands in taxes -- and only 20% of eligible Americans take advantage of it.

We kick off this report with the five little-known tips potentially worth $339,231. Here's what we'll cover:
The Health Savings Account (HSA) - This under-appreciated retirement account deserves a look. In one scenario, this could mean nearly $50,000 in tax savings.
The Retirement Savings Contributions Credit - If you qualify, this could pad your retirement pockets in addition to the retirement contributions you're already making.

An Exotic Retirement - Sure, Florida's no state income tax and sunshine is lovely, but there's another way you could save tens of thousands of dollars.
The Social Security Decision Point - You could get an extra $16,146 if you time it right.
Medicare Enrollment - Understand this one critical rule and you could avoid having your medical insurance premiums permanently increased.
Then, as a bonus, we'll dive into six retirement income boosters that you've probably heard of, but may not fully understand yet...

5 Ways to Retire Wealthier (That Most Americans Don't Know)
1. HSA: A retirement account you haven't thought of yet

When you ask most Americans what the best tax-advantaged retirement account is, you're likely to hear answers such as "401(k)," "Roth IRA," or "Thrift Savings Plan."

While these are all excellent ways to save for retirement, one type of account that deserves to be a part of the conversation is the health savings account, or HSA. 

On the surface, you may not think of the HSA as a retirement account. After all, the main purpose of the HSA is to allow people with high-deductible health insurance policies to save money for healthcare expenses. However, these accounts can also be excellent retirement savings vehicles. 

If you're eligible for an HSA, you can contribute funds on a pre-tax basis, up to annual limits set by the IRS. You can invest that capital in a variety of mutual funds or other investment options, depending on your financial institution. Any withdrawals that you use to pay for qualified healthcare expenses are 100% tax-free, no matter how much your investments have earned. This double tax benefit is unheard of in other types of investment accounts. 

Here's where the retirement aspect comes in. Money in an HSA carries over from year to year, meaning you don't have to spend the funds on healthcare expenses each year as you would with a flex spending account. Once you turn 65, you can use the money in the account for any purpose (including retirement income) without incurring a tax penalty. In a nutshell, an HSA combines the advantages of tax-deferred retirement investing with the added bonus of tax-free withdrawals for healthcare expenditures. 

Let's look at an example of what this could mean to you if you have a high-deductible health plan and qualify for a HSA. We'll say you and your spouse are both covered under your plan, which makes the annual contribution limit $6,900 per year as of 2018. If you were to contribute this amount to an HSA each year for the 10 years leading up to your retirement and achieve 7% annualized investment returns, this could translate to an additional $95,334 in usable retirement savings. 

Along the way, this would also have excluded $69,000 from your taxable income. If you're in the 22% marginal tax bracket, for example, this translates to $15,180 in pre-retirement tax savings. And here's the best part: If you choose to use the money in your HSA to cover out-of-pocket healthcare expenses in retirement -- which will cost the average retired couple $245,000 in today's dollars -- you won't be taxed on your withdrawals, either. 

Assuming you're still in the 22% tax bracket after retirement, and you withdraw $10,000 from the account per year to cover healthcare expenses, the account would last for over 13 years (remember, your investments will still be generating returns), and resulting in tax savings in retirement of $29,597.

Total tax savings before and after retirement: $44,777.

2. Get free money to save for retirement (really)

It's common knowledge that the money you choose to defer into your 401(k), 403(b), or 457 plan can lower your taxable income and that traditional IRA contributions can get you a tax deduction.

However, there's another retirement savings tax benefit that isn't quite as well-known: the Retirement Savings Contributions Credit. More commonly known as the "Saver's Credit," this credit is designed to give low- to middle-income households free money to save for retirement. 

The Saver's Credit is worth up to 50% of the first $2,000 in retirement contributions ($1,000 per year) for qualifying individuals, and married couples can potentially get the credit for each spouse. Qualifying savers can claim this credit in addition to other tax benefits related to retirement saving, such as a traditional IRA tax deduction.

Depending on your adjusted gross income (AGI) and tax filing status, you could qualify for a credit of 10%, 20%, or 50% of up to $2,000 in qualifying retirement contributions. For 2018, the income ranges for the Saver's Credit are:

Credit Amount                                                                                 Qualifying AGI Range
                                                            Married Filing Jointly                  Head of Household         All Other Filers
50% of contribution                            Up to $38,000                              Up to $28,500                 Up to $19,000
20% of contribution                            $38,001 - $41,000                        $28,501 - $30,750           $19,001 - $20,500
10% of contribution                            $41,001 - $63,000                        $30,751 - $47,250           $20,501 - $31,500
No credit                                              Over $63,000                               Over $47,250                   Over $31,500

Here's how this could help a typical couple. Let's say you and your spouse earn a total of $60,000 per year ($30,000 each), which would qualify for the 10% credit rate. You both choose to contribute 7% of your salaries to 401(k) plans at work, which translates to $4,200 in combined retirement contributions per year. This is enough for both spouses to max out the Saver's Credit.

In this case, you would be entitled to a $400 tax credit per year. Over a 10-year period, this means that you would get $4,000 in tax savings (in 2018 dollars; inflation will likely make this benefit even greater) on top of the tax benefit you're already getting for contributing to a 401(k).

Total savings over a 10-year period: $4,000.

3. Location, location, location

Many Americans know that moving to another state can significantly reduce your cost of living. Aside from the sunny weather, this is a big reason why so many retirees end up in Florida, where there is no state income tax, a generous property tax exemption for seniors, and many areas with a generally low cost of living.

However, the savings you achieve through any domestic move can be small potatoes compared to the money you might save if you're willing to give international living a try.

You may be surprised at how far a modest retirement income will go in a country like Costa Rica, just to name one example. A nice three-bedroom apartment in a major city can be had for about $850 per month, and housing outside of city centers is significantly cheaper. A single retiree can live quite comfortably on a budget of about $1,500 per month (or about $2,000 for a couple), healthcare is highly rated, and residency permits are easy for most retirees to get. 

While it may seem intimidating to pack up and leave the United States, the savings can be mind-boggling. Consider that the average household in the 65-74 age group spends $50,873 per year, or $4,239 per month. For a couple who can live in Costa Rica for roughly $2,000 per month, this translates to $26,868 in annual savings.

Looking for other destinations to stretch your retirement dollars? Check the top nine places to buy real estate abroad.

Total savings over a 10-year period: $268,680.

4. Know when you should claim Social Security

Americans who qualify for Social Security benefits can claim theirs at any time between age 62 and 70. And while claiming at the right age could result in tens of thousands in additional income over the long run, there's unfortunately not a one-size-fits-all answer to when the "right age" to claim Social Security is.

The Social Security Administration (SSA) designates your "full retirement age," or the age at which you're entitled to receive your full retirement benefit. Your full retirement age depends on the year in which you were born, and it's somewhere between 65 and 67. However, you can claim your benefits any time between age 62 and age 70. The sooner you file for Social Security, the smaller your monthly checks will be -- but at the same time, the sooner you file, the more checks you'll receive throughout your lifetime. No matter which age you choose, you'll have to make a tradeoff between the size of your benefit checks and the number of checks you receive.

There are some good reasons to claim Social Security before reaching your full retirement age, as the majority of Americans do. For example, if you're in relatively poor health, then it may be smart to claim right away so you can enjoy the extra income while you have the chance. And if you're forced to leave the workforce earlier than you had planned, then taking your benefits early will help you get by without draining your savings.

On the other end of the spectrum, there are some good reasons for waiting as long as possible. Most obviously, the SSA will permanently increase your monthly benefit, as well as any survivors' benefits your spouse and/or other dependents would be entitled to in the event of your death.

Let's look at some examples of how different choices might play out. We'll say that you're a 62-year-old man in 2018, and you'd be entitled to a $1,375 monthly Social Security benefit (in today's dollars) if you were to claim benefits at your full retirement age of 66 years and four months. (Note: $1,375 is the average benefit paid to a retired worker as of November 2017.)

According to the Social Security Administration's actuarial tables, the average 62-year-old man will live about 20 years more. In other words, if you start collecting Social Security now and are in average health, you can expect to collect benefits for 20 years. Meanwhile, the average 70-year-old man lives for another 14.3 years.

The question is whether delayed-retirement credits will make up for the shorter collection period. Assuming the SSA raises benefits by 3% per year to keep up with the cost of living, here's the total dollar amount you could expect to collect throughout your lifetime if you claimed at various ages:

Claiming Age                Life Expectancy (years)  Initial Monthly Benefit (today's dollars)   Total Benefit Collected
62                                   20.0                                    $1,008                                                            $346,871
65                                   17.8                                    $1,260                                                            $349,028
66 years, 4 months         16.9                                    $1,375                                                            $359,894
70                                   14.3                                    $1,778                                                            $374,235
Data Source: SSA and author's calculations. Life expectancies are slightly higher for women.

The average man would collect $14,341 in additional Social Security benefits by waiting until 70 to collect Social Security instead of claiming benefits at his full retirement age. For the average woman, the difference comes to $17,950 due to a longer life expectancy. This means the average American could get an extra $16,146 by waiting until age 70, rather than filing "on time." 

Additional income for the average retiree: $16,146.

5. Make sure you know this critical Medicare rule
If you're already collecting Social Security benefits when you turn 65, then you'll be enrolled in Medicare Parts A and B automatically. If you aren't yet collecting Social Security, and you don't have qualifying health insurance through your employer, then you'll need to enroll during your initial enrollment period, which is a seven-month window beginning three months before the month you'll turn 65.

For example, if you'll turn 65 in July 2018, then your initial Medicare enrollment period will run from April 2018 through the end of October 2018. If you enroll during this window, you'll be considered to have enrolled on time. 

Here's the critical point to remember: If you fail to enroll during your initial enrollment period, your Medicare Part B (Medical Insurance) premiums can be permanently increased. Specifically, unless you maintain qualifying coverage through an employer, each full year past age 65 in which you don't enroll will increase your Part B premiums by 10% for the rest of your life. Medicare estimates that someone who waits two full years past their 65th birthday to enroll will end up paying an average of $5,628 more in lifetime premiums, and that doesn't even include the effects of inflation. People who wait even longer to enroll will be penalized more. 

Potential savings: $5,628 or more.


BONUS! Six Retirement Income Boosters
1. A reverse mortgage can boost your retirement income, but it isn't right for everyone

If  you own your home and are at least 62 years old, you may be able to tap into your home equity through a reverse mortgage. 

In contrast to a traditional mortgage, a reverse mortgage involves a lender making payments to a homeowner -- in either a lump sum or a series of payments -- in exchange for equity in the home. This can create a nice stream of income throughout retirement while allowing you to continue living in your house. 

To be clear, there are some downsides to a reverse mortgage. To name a few:

Most obviously, you lose equity in your home over time. If you plan to leave your house to your children, a reverse mortgage is probably not for you.

Reverse mortgages can be expensive. According to the National Reverse Mortgage Lenders Association, a $100,000 reverse mortgage can come with more than $10,500 in fees, mortgage insurance, and other closing costs.

You don't have to pay back a reverse mortgage until you sell your home, no longer occupy it as your principal residence, or don't keep up with the property taxes and maintenance. If your retirement plan includes an eventual move, think twice before you get a reverse mortgage.

If these downsides don't sound too scary to you, then a reverse mortgage could certainly boost your cash flow in retirement: The average home value in the U.S. is $206,300, according to Zillow, and the National Reverse Mortgage Lenders Association's calculator estimates that a 65-year old couple with an average-valued home could get monthly cash flow of $422.74 from the equity in their home. Over a decade, this translates to $50,729 in additional retirement income. Plus, as is the case with most loans, that money is tax-free!

Additional retirement income for average 65-year-old couple: $50,729 over 10 years.

2. Protect your nest egg from long-term care costs

One of the largest expenses retirees face is healthcare. A 65-year-old couple retiring today will need an average of $275,000 to cover their medical expenses throughout retirement, according to Fidelity. And this figure can get astronomically higher if you end up needing any form of long-term care, such as a room in an assisted living facility. 

The average monthly cost of a semi-private room in a nursing home was $6,844 in 2016, according to Genworth. Half of long-term care patients require more than a year of care, and of those who do, the average is four years. It's easy to see how this can get expensive quickly. And unfortunately, most long-term care costs are unlikely to be covered by Medicare.

A smart way to prevent long-term care needs from destroying your retirement savings is to consider a long-term care insurance policy. These policies generally reimburse a fixed daily amount for long-term care services, and the amount and scope of coverage can vary significantly among policies. 

A long-term care policy can be dramatically cheaper if you buy it well before you retire -- say, in your 50s. Even so, expect a long-term care policy to cost thousands per year, though this will be a small fraction of the cost of long-term care if you're uninsured. 

3. Take advantage of senior discounts -- you may be surprised at how they add up

You've probably seen plenty of businesses advertising "senior discounts" before, but you might be surprised at not only how many businesses offer discounts, but how liberal the definition of "senior" can be.

For example, grocery chain Fred Meyer offers a 10% discount on the first Tuesday of each month to shoppers over age 55. Many restaurant chains also offer discounts, as do many movie theaters, mobile phone carriers, and clothing retailers. Kohl's offers seniors 15% off on Wednesdays, Ross Stores offers 10% off on Tuesdays, and AMC Theaters offers up to 30% off for moviegoers aged 55 and older. 

There are also some outside-the-box discounts you may not even have thought of. Did you know that many state universities and community colleges provide tuition waivers for seniors who want to take classes and even earn new degrees?

How much could this save the average retiree? Consider these budget items for the average retired household, according to Bureau of Labor Statistics data for households in the 65-74 age group:

They spend $550 per month on food, including $332 on groceries and $218 eating out. 

They spend $238 per month on entertainment.

They spend $105 per month on clothing.

If the average senior household managed to obtain a 10% senior discount in just these three categories, it would add up to $89.30 in savings per month, or $1,071.60 each year. Over a decade, this is an additional $10,716 that doesn't need to come out of your retirement accounts.

Total savings over 10 years: $10,716

4. Asset allocation can make the difference between going broke in retirement and keeping a million-dollar nest egg

The wrong asset allocation in your 401(k), IRA, brokerage account, or other savings vehicle can rob you of returns over the years or set you up for unwanted volatility in retirement. 

While there are several ways to determine the proper asset allocation for investment accounts, one common way is to simply subtract your age from 110 to find your ideal stock (equity) allocation and put the remainder of your portfolio in bonds (fixed income). For example, a 50-year-old following this guideline would keep roughly 60% of their assets in stocks and the other 40% in fixed-income investments.

Stocks undeniably have greater potential than bonds to make large long-term gains, but they also tend to be more volatile over shorter time periods. On the other hand, while bond investments can provide you with steady income, they also limit your long-term return potential. It's important to find a good age-appropriate balance and to adjust it over time. Over the long run, stocks tend to generate annualized returns in the 9%-10% range, while bonds tend to return 4%-5%.

This is especially important for retirees, as there is a popular misconception that older investors should avoid stocks completely. Doing so can rob you of growth potential, causing your savings to lose value to inflation.

Here's a simplified example. Let's say you and your spouse retire at age 65 with $1 million in combined retirement savings. We'll also assume that stock investments average 8% returns (which is historically conservative), while fixed-income investments average 4%. Finally, let's say you withdraw $40,000 of your retirement income during your first year of retirement and increase your withdrawals by 3% each year afterward to keep up with inflation.

In this example, a portfolio made up of 100% fixed-income investments would last for 28 years. Will this be enough to last throughout retirement? For retired couples, there's a 31% chance that at least one spouse will live to 95, so don't count on it.

On the other hand, a portfolio that's split 50-50 between stocks and fixed income would last well into your 100s in this scenario. In fact, based on our assumptions, such a portfolio wouldn't even start to decline in value until you turned 85, at which point your portfolio would have reached a value of more than $1.2 million. Meanwhile, the all-bond portfolio would theoretically be worth just $637,000 after 20 years.

Of course, this is a simplified example, and there's no way to predict what the market will be doing over time, but historical trends don't lie. A properly allocated $1 million retirement nest egg could be expected to be worth $590,000 more after 20 years than one that avoids stocks altogether. After 10 years, the theoretical difference is already more than $215,500.

Potential savings over 10 years: $215,571.

5. Knowing your retirement "number" can give you a concrete savings goal

Do you know how much you'll need to save for a comfortable retirement? The most common figure in Americans' minds is $1 million, but that's partly because it sounds right -- not because most workers have taken the time to calculate their ideal savings goal. And in many cases, $1 million may not be enough.

Here's the secret: It's not about how much money you have in the bank. It's about how much income you need to generate after Social Security and other sources like pensions are taken into account. 

A good rule of thumb is that you'll need about 80% of your pre-retirement income to maintain your standard of living in retirement. So if you and your spouse earn a combined $100,000 per year, you can expect to need about $80,000 in retirement income. 

Next, you need to figure out how much income you'll receive from sources other than savings. To continuing our example, if you and your spouse expect a total of $30,000 per year from Social Security and another $10,000 from a pension, this leaves $40,000 that will need to come from savings. 

While it's admittedly not perfect, the "4% rule" of retirement says you can safely withdraw 4% of your savings during your first year of retirement. This rule was devised by William Bengen in 1994 to determine a responsible withdrawal rate for retirement savings, and it essentially says that if you withdraw 4% of your retirement savings during the first year and adjust that amount for inflation in subsequent years, you can expect your savings to last for more than 30 years. As Bengen put it, "In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer."

In a nutshell, based on an annual income need of $40,000, this implies that you'll need $1 million in savings.

You're not quite done yet, though: You need to adjust this for inflation (plan for about 3% per year over the long run). You may find that your retirement savings need to be significantly higher than you think.

6. Know your options with your old 401(k)s

If you have a 401(k) and leave your job -- whether due to job loss, resignation, or retirement -- there are four main options that may be available to you: 

You may be able to leave your savings in your old employer's plan, where the money will remain invested until you're ready to withdraw it. This is often subject to a minimum balance requirement, and as an ex-employee you may incur higher costs.

You may be able to roll your 401(k) over into your new employer's plan (if the new employer offers one). Sometimes there's a waiting period before you're allowed to do this.

You can roll the account into an IRA.

You can cash out the account. 

As you may imagine, the last option, cashing out, is rarely a good idea. If you're not in your late 50s, you'll likely owe income taxes and a 10% penalty on the amount withdrawn. Unless you need the money for an emergency and have no other way of getting the money, cashing out is a bad idea.

On the other hand, all three of the others can be good options. It depends on the characteristics of the 401(k)s available to you, as well as how much control you want over your investments. 

First off, if you prefer to take a hands-off, "set it and forget it" approach to retirement savings, a 401(k) may be your best choice. Just make sure you know the fees charged by each plan's investment options. Most 401(k) plans offer the same basic types of investment funds, but the fees (known as the expense ratios in your plan's literature) can vary considerably. 

Just as an example, if you have a $50,000 401(k) balance and two plan options -- one with an average expense ratio of 0.50% and one with an average of 1% -- the higher-cost plan could rob you of nearly $16,000 in investment gains over a 20-year period, assuming 7% annualized investment returns. It's difficult to overstate how important low-fee investing is.

If neither of the 401(k)s available to you has an attractive fee structure, or if you simply want more investment options, then your smartest choice may be to roll your 401(k) over into an IRA. In addition to being able to select from thousands of funds and compare their fees on your own, you'll be able to invest in virtually any stock, bond, or ETF you want. 
The average man would collect $14,341 in additional Social Security benefits by waiting until 70 to collect Social Security instead of claiming benefits at his full retirement age. For the average woman, the difference comes to $17,950 due to a longer life expectancy. This means the average American could get an extra $16,146 by waiting until age 70, rather than filing "on time." 

Additional income for the average retiree: $16,146.

Build a better retirement!