What to Do When Retirement Savings Fall Short
One of the biggest questions for individuals who are nearing retirement age is what to do if they haven’t saved enough to retire. With Social Security income representing only part of most retiree’s income sources and pensions becoming less common, it is commonplace for individuals near retirement to find themselves in a position where they haven’t saved enough for retirement.
Studies have shown that generally, individuals are not saving enough for a retirement period that could span 30 years. Another commonplace problem, in our opinion, is that many individuals do not track their spending. Spending is one of the major financial variables that individuals can control. When we think about tracking spending, it goes beyond just the “major” spending items and beyond looking at a credit card summary which does not capture all spending. Software is available that can help track where all the cash received goes – we make available to our clients software to track spending and encourage our clients to use this free service.
The good news for many individuals is that by adjusting their retirement plans slightly, they may not have to delay retirement as much as they think. A recent article from NerdWallet by Liz Weston highlights how working slightly longer can greatly impact the sustainability of your retirement portfolio. In the article, she cites a recent retirement study that shows:
- Working three to six months longer was the equivalent of saving an additional 1% for 30 years.
- Working just one extra month was similar to saving an additional 1% for 10 years before retirement.
- Delaying the start of retirement from age 62 to age 66 could raise someone’s annual, sustainable standard of living by 33%.
One of the biggest reasons why working a little longer (whether a few months or a few years) is so powerful for those who haven’t saved enough is because it allows an individual to delay when they start collecting Social Security benefits. For an individual who defers collecting Social Security from full retirement age (age 66 to 67 depending on date of birth) to age 70, the monthly benefit will increase by 8% per year for each year you delay benefits. That’s an increase of as much as 32%! The results are similar if you delay from early retirement age (62) to full retirement age.
We find that there is confusion around the financial aspects of Social Security benefits and when to claim them. We work closely with our clients in this area, evaluating various options available for Social Security benefits, when to start benefits, the impact on the client’s spending plan, as well as their financial and investment plan. In general, it is not advantageous to start benefits at age 62 (as always, there can be exceptions to this depending on the specific financial and health situation for a family or individual). Once benefits are received, there are no planning options available. As we like to say, you get one shot at retirement, so it is very important to work with an advisor who can evaluate income sources, the spending plan, the investment plan and most importantly the financial goals and objectives. The goal is to ensure that the financial assets and cash flows are in line with the goals and objectives.
Individuals who are in their 50s or 60s may also be in their peak earning years and may be able to max out employer plan contributions. As of 2019, this could be as much as $25,000 per year in a 401(k), not including employer match. Working four extra years can result in adding an extra $100,000 to your 401(k). Assuming a 30 year retirement time horizon, this could provide an extra $4,000 per year in withdrawals based on a sustainable withdrawal rate of 4% (actual sustainable withdrawal rates vary depending on individual circumstances).
An important takeaway from the study referenced above by Liz Weston, and we agree, is that younger individuals should not use the work longer option as a substitute for saving as much as they can for as long as they can. Individuals in their 30s and 40s have decades to compound their savings and investments. The power of compounding is the eighth wonder of the world and needs to be taken advantage of as early in life as possible. Assuming a modest 7% annual return, a lump sum doubles approximately every ten years. Adding to the lump sum investment account monthly or annually will result in significant growth over decades.
Those nearing retirement should take heart in the fact that sometimes with a few minor tweaks, an individual can have a successful retirement even if they have not saved enough. Here are a few tips that individuals in their 50s and 60s should keep in mind when planning for retirement:
- Save as much as you can for as long as you can. Most individuals only get one chance to retire and going back to work later on may be undesirable or not possible.
- Remember the biggest thing you can control is your level of spending. If your portfolio withdrawals at the beginning of retirement are too high, it can make it difficult to make adjustments later on especially if you have grown accustomed to a certain lifestyle.
- Start developing a spending plan now that encompasses your goals. Even if you’re still several years away from retirement, it’s helpful to get at least a high level view of what your expenses could be in retirement so you can plan ahead. Some common goals retirees have is traveling, joining a club, giving to charity, or leaving a legacy.
- Structure your financial life such that you live below your means. Doing so means that you will have flexibility, which is important as “life happens”. Even with a well-developed financial and investment plan, individuals who live at or above their means could have problems when unforeseen events occur. Living below your means provides a margin of safety.
- Once you have developed a spending plan, you can think about how much income you need in retirement. Outside of your retirement savings, you may have access to Social Security income, a pension, annuities, or other income sources. This can provide a framework for determining how much you need in portfolio withdrawals.
- Consider part-time work if you need to supplement your income. Sometimes a few years of part-time work can help alleviate stress on your portfolio and allow your portfolio time to continue growing.
- Make sure to put in place an estate plan. This includes obtaining the necessary estate planning documents such as a Last Will and Testament, Living Will, Durable Power of Attorney, and Health Care Surrogate. These documents help determine things like who inherits your assets, who can access financial and medical records, and more. You may even need a trust if you’re in a second marriage, want to control assets after death, or have other unique circumstances.
River Capital Advisors regularly helps individuals in developing a retirement plan. Whether you are years away from retirement, about to start retirement, or are already retired, it’s never too late to start planning. Please contact us if you would like to learn more about our services and if you are interested in receiving a free copy of our retirement planning guide.