How to Successfully Stretch Your Retirement Income
Not surprisingly, ever since the markets crashed in 2008, Baby Boomers have become increasingly pessimistic about retirement and running out of money. A recent report shows that Americans’ confidence in their ability to retire comfortably is at a historic low. (Source: “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” Employee Benefit Research Institute, March 2012; last accessed December 21, 2012.)
Just 14% are “very confident” they will have enough money to live comfortably when they retire; on the other end of the scale, 23% say they are “not at all” confident. A full 43% of American workers say job uncertainty is the most pressing issue facing America today.
Many workers also noted that they have virtually no savings or investments. The report shows that 60% of workers report the total value of savings and investments (excluding primary home and defined benefits plan) is less than $25,000.
In total, 19% of workers are “very confident” they have done a good job preparing for retirement; almost 20% say they are “not at all confident” in their preparation for retirement.
Of those already retired, 27% believe they have done a good job preparing for retirement; before the Great Recession, it was around 40%. At the same time, only 21% are confident that they have enough money to last throughout their retirement; in 2007, 41% were confident.
All told, almost 60% of middle-class retirees will likely run out of money if they maintain their pre-retirement lifestyle and don’t cut spending by at least 24%. Not spending can certainly help your retirement money last longer, but it’s not the only thing you can do.
Stretch your retirement income by becoming more actively involved in managing your investment accounts and savings. Understand how they generate income over time and the risk factors.
Check web sites, or the library, or sit down with a financial planner. Retirement may be a number of years away, but you still need to have a game plan. Setting up a strategic financial plan will not just tell you where you currently stand financially, but it will also show you if your current retirement plans are feasible. If they aren’t, you have plenty of time to tweak your plans.
Social Security was never supposed to be the sole source of retirement income, but it is a good starting point. If you can couple Social Security with a company pension, you have two excellent sources of guaranteed income.
If you don’t get a pension from work, you can still enjoy guaranteed income with an annuity. Annuities are similar to a self-directed pension. Purchasing an immediate annuity will create a stream of monthly payments; if retirement is still years away, you could consider a deferred annuity.
Fixed annuity payments are guaranteed by an insurance company. Variable annuity payments are tied to the performance of an underlying investment and can fluctuate. Just like the stock market, higher returns come from greater risk.
Rebalance Your Portfolio
Review your retirement investments to see if you need to rebalance your portfolio. Have your retirement goals changed? Or, have the markets changed? Rebalancing your portfolio allows you to accommodate your changing plans.
If retirement is a long way off, and you’re comfortable with more risk, you may want to rebalance your portfolio and invest in higher-risk equities.
If you’re zeroing in on retirement, you may want to forgo risk and volatility, and keep your funds in safe havens like certificates of deposit (CDs), annuities, or Treasuries. Just like the stock market, you have to ensure your “safe havens” are financially stable. Check their financial statements and past performance, and what, if any, kind of safety net exists.
If you’re not sure what to invest in, talk to an objective financial advisor, someone who isn’t motivated to sell products based on a commission.
Maybe retiring at 65 isn’t in the cards. According to the same study, seven percent say they will never retire. A full 26% don’t expect to retire until they are older than 70, the highest number in over 20 years. All told, 44% expect to work beyond 65.
What are the upsides to working into retirement? For starters, you have more time to build up your retirement accounts and, if possible, take advantage of company medical plans. Even working part-time past 65 could significantly impact your financial picture.
Staying active both mentally and physically can improve both the health and the quality of life. It can also help financially. Creating a financial plan will show you if an early retirement is in your future. If not, you may only have to work a few years more than expected.
Save More by Spending Less
That doesn’t mean just skipping the odd lunch or coffee, or only buying when items are on sale. An item might be offered at 50% off…but you only get that “savings” if you spend money in the first place. Don’t buy an item, and you save 100%. Saving is what we have after we finish spending; if we can control spending, we’ll be better off.
If you want to spend less, start by putting more in your company retirement plan, especially if the company matches your deposits.
To help spend less and save more for the future, you could sock money away in 401(k)s or 403(b)s; both help defer tax, meaning you pay less income tax today.
If you’re self-employed, look into an SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement), SIMPLE-IRA (Savings Incentive Match Plan for Employees Individual Retirement Account), profit-sharing plan, or even a 401(k). Other ways to save for retirement include individual retirement accounts (IRAs) and Roth IRAs (where the tax break on the money comes when it is withdrawn during retirement).
Once retired, the less you can spend in retirement, the better. The lower your costs in retirement, the less income you will need.