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Let’s start with the stats. The reality is that when many people plug their investment account balance into the common retirement income calculators, the results are discouraging and, frankly, depressing.
According to Fidelity Investments, the average 401(k) account balance for 50-somethings is a meager $160,000.
According to the Social Security Administration, for 62% of retirees, Social Security is 50 percent or more of their income; for 34 percent of retirees, Social Security accounts for 90 percent or more.
The reality is even harsher for women: savings balances are lower, and there are more years of retirement to fund as women live longer than men on average.
What do you do if you are on the cusp of retirement – less than 10 years – and you simply do not have enough in savings?
What is Enough?
First, redefine the word “enough.”
Will you fall short because you’ll lack the income in retirement to maintain your current lifestyle?
Consider the sources of income you will have and the necessary expenses you'll face to enjoy a comfortable retirement.
It may very well be the case that you’re already living close to the bone. But if not, right now, you need to decide what compromises you can make.
While some costs will fall away in retirement, others will surely rise.
Even with Medicare available at the age of 65, the average retiree could face out of pocket medical expenses of $5000 to $6000 per year, not including the cost of long term care.
At this stage, it’s overly simplistic to say that your income needs in retirement will be 80% or so of your current annual income, as is a commonly touted rule of thumb.
You’re close enough to retirement that you must now forecast what your spending needs will be with a higher degree of accuracy. (And do not forget to account for inflation.)
Where You Live
Housing is likely your most significant expense.
Considering housing costs alongside taxes and the price of medical care, some people will contemplate a dramatic move to a place with a lower cost of living, perhaps even overseas.
But if finances are your sole reason for relocating away from your friends, family, and community connections, I would urge you to reevaluate that idea.
Retirement lasts a long time; you want to be surrounded by the people you love and who can support you. So if a move will allow you to both save money and be closer to a trusted support network, that’s a win-win.
If you'll pay off your mortgage before you stop working (and it’s a home you can safely and affordably remain in as you age), then you’re ahead of the game.
For the rest of us?
Calculate your mortgage or rent payment as a percentage of your expected Social Security payment; if the percentage is more than about one-third, every day in retirement may be a struggle without cash flowing in from another income source.
Can you use these years between now and retirement to downsize?
Can you acclimate to a home with a smaller footprint and/or in a different but still acceptable neighborhood?
Is there a possibility of refinancing your mortgage at a lower rate (and yes, extending the term of the mortgage) to reduce the monthly payment to a more comfortable level?
If it’s inevitable that you’re going to carry a mortgage into retirement anyway, it may as well be as cash flow friendly as possible.
What should take priority right now, retirement savings or debt repayment?
When you’re a single digit number of years away from retirement, concentrate on eliminating as much debt as possible (except your mortgage, unless it is close to pay off).
Doing so will allow your money for retirement to be solely focused on daily needs and wants. Not paying for yesterday’s decisions.
Your monthly retirement check, perhaps limited to Social Security, needs to be as unencumbered as possible. Please do not enter retirement with unsecured consumer debt.
If your highest non-housing debt payment is a student loan, now’s the time to calculate whether paying it off before or shortly after retirement is realistic or not.
I would very much love for you not to carry a student loan payment through retirement. But for many, it’s simply unavoidable; according to the AARP, 2.8 million people aged 60 or older have student loan debt.
If you have sizeable federal student loans that you cannot realistically repay before retirement, are you on an income-driven repayment program?
If so – heresy alert! – pay only the minimum amount. Any balance remaining will be forgiven after 20 or 25 years of payments, depending on the loan type. (The forgiven amount will be taxable.)
Emotionally, it may be helpful to “rethink” your student loan debt as “$X * Number of Payments Remaining” rather than the total balance owed.
Now I do want to talk about your retirement savings.
After putting your debt repayment plan in place and, of course, shoring up your current emergency savings, quite obviously, the next step is to increase your savings rate as much as possible.
But let’s be clear: you cannot depend on the market to bail you out.
With retirement close by, you do not have enough years to put your savings at great risk in the hope that outsized stock market investment returns will deliver the portfolio balance you need.
Yes, you need to invest some in equities (retirement can last for decades).
But while you may have the emotional risk tolerance to bet it all, with only a few years between now and when you may need to draw on this account, you do not have the objective risk capacity to do so.
The most significant risk to the longevity of a retirement portfolio is when you must sell investments early in your retirement in a down market.
What else should you invest in?
Your health, for one. While nothing is guaranteed, the best way to reduce your spending on medical needs in retirement is to be as healthy as possible at the start.
Every neighborhood has “that house”; the one close to falling down, lived in by an elderly person who can no longer afford its upkeep.
If you own your home and intend to keep it, use your remaining wage-earning years to get up to date on necessary (not merely cosmetic) maintenance.
You want your home as valuable and cost-efficient in retirement as possible and less of a drain on your limited cash flow.
The equity in your home is likely your largest asset in retirement; investing in your home now to maintain its market value will provide you with options in the future should you need to access a large sum of money.
And finally, Social Security.
Many Americans take Social Security when they are 62 years old. But unless you’re physically unable to work, that’s not going to be you.
You cannot afford the significant permanent reduction in monthly benefits that happens when you draw on Social Security before your full retirement age (67 for those born in 1960 or later).
Since Medicare is not available until you are 65 years old, how would you pay for healthcare if you left your job before then?
In fact, the question to ask is: “Can I continue working past my full retirement age?” For each year that you wait until the age of 70, your benefit increases by 8%.
If you have not done so already, download your Social Security Statement and see what your likely monthly benefit will be.
While you may consider taking on a part-time job for extra money to fill a monthly income gap in your later years, that may not be an option.
Strive to beef up your retirement nest egg now to reach your retirement goals.
Does your family understand your situation?
Are you providing financial support to an adult child that you cannot afford in reality?
Facing this is incredibly emotional and difficult. While there are certain instances when not providing support would be tragic for all concerned, you’re not doing your family any favors by neglecting your own needs now only to rely on them financially in the future.
If you have children entering their college years when you’re in your late 50s or early 60s, your retirement account balance must take precedence over their tuition.
It’s a cliché, but it bears repeating: they can borrow money for college, but you cannot borrow for retirement.
In summary, here’s the playbook:
- Be prepared to change your definition of the “ideal” retirement.
- Get granular in understanding your expenses in retirement and what source of income besides Social Security you can expect.
- Eliminate as many monthly debt payments as possible before retirement. Minimize the size of the payments that will persist in retirement.
- Besides investing in employer retirement benefit plans and individual retirement accounts (IRAs), make smart investments in your health and home to protect your cash flow in retirement.
- Don’t swing for the fences with your investment account asset allocation. You can’t afford the risk to your retirement fund. Develop a sound investment strategy to strive for a reasonable rate of return.
- Know your Social Security numbers. Keep working, delaying drawing retirement benefits as long as you can.
- Communicate your situation with your family. Do not make financial commitments you cannot afford to keep. Your retirement plans must be a priority.
None of this is easy (but it won't get any easier waiting). You may face having to make difficult choices you never thought would be necessary.
However, any decision you make now will be far less painful than the alternative of no longer being able to work and then realizing you cannot afford to live with the comfort, dignity, and stability you desire.
Avoid making further retirement planning mistakes now.
Article written by Lisa Whitley, AFC®, CRPC®.
Lisa enjoys having money conversations every day with people from all backgrounds. After a long career in international development, she brings a cross-cultural dynamic to her current work to help individuals and families achieve financial wellness.