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To maintain your standard of living in retirement, the rule of thumb is that you should be able to replace at least 70% of the income you had while you were working.
But according to research from Goldman Sachs Asset Management, many retirees are falling short of that retirement income target. The survey surveyed 1,566 US participants between July and August 2022.
Only 25% of retirees generate that amount, the company’s research found. Meanwhile, more than half of retirees – 51% – have to settle for less than 50% of their pre-retirement income.
The gap is not surprising, given that more than 40% who are still working say they are behind schedule with their retirement savings. Members of the Gen X generation – who are sandwiched between millennials and baby boomers – were the most likely to say they are behind in retirement at more than 50%.
Competing life goals and financial priorities — a so-called financial vortex — can get in the way as savers balance other roles as parents or caregivers and as homeowners or renters.
“You have all these competing priorities that can crowd out retirement savings,” said Mike Moran, senior retirement strategist at Goldman Sachs.
If you’re still working, there are steps you can take to meaningfully increase your cash flow in your later years and increase your chances of meeting that 70% income replacement rate.
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1. Reduce your lifestyle
By lowering your cost of living now, you will need less income when you retire. Ask yourself if you’re spending less than you earn, said Sharon Carson, retirement strategist at JP Morgan Asset Management.
“If you haven’t already, that’s the perfect place to start,” she said.
Ted Jenkin, CEO and founder of Oxygen Financial and a member of CNBC’s Financial Advisor Council, said he recommends a 21-day budget cleanup to help people reduce their spending.
Buy every bill in your household for 21 days to see if you can get a better deal.
2. Increase your savings
Even if your budget is tight, increase the amount you put aside for retirement by as much as 1% of your salary can go a long way when you eventually need to withdraw that money.
In general, according to pension experts at JP Morgan Asset Management, you should save 15% of your salary for retirement. That could be a company match, if you have one.
You may not get to 15% right away.
“Look at what you can do each year,” Carson said. “If you can do something, you have the long-term benefit of the compound.”
3. Find ways to save outside of work plans
If you don’t have access to a 401(k) or other retirement savings plan through your employer, you’re not alone. It is estimated that as many as 57 million Americans do not have access to a workplace retirement savings plan.
You can still contribute to an individual retirement account with pre-tax money, or with after-tax money through a Roth IRA. Some restrictions apply. For example, there are some limits on pre-tax contributions if a spouse has a workplace plan, and after-tax Roth contributions depend on your income.
Many states are also doing their best to offer retirement savings programs to employees who don’t have access to employer plans.
4. Stay invested
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The No. 1 favorite source of retirement income for retirees, surveyed by Goldman Sachs, was investments, Moran said. To get more income from your portfolio, you might want to consider dividend-paying stocks or municipal bonds, he said.
The key is to stay invested and not put your money in and out of the market, Carson said.
Admittedly, losing hurts. But trying to time the market can be a losing battle, especially since the market’s worst days are often closely followed by their best days.
“If you’re trying to time the market, you have to be right twice,” Carson said.
5. Postpone applying for Social Security benefits
The longer you wait to claim Social Security benefits until age 70, the larger your monthly checks will be.
You can claim from the age of 62, but your benefit will be reduced.
At full retirement age — ages 66 through 67, depending on when you were born — you’ll receive the full benefits you earned.
For every year you exceed that age, up to the age of 70, you will receive an increase of up to 8%.
It’s still smart to wait, even with a historically high cost-of-living adjustment of 8.7% this year, experts say.
The COLA increases the so-called amount of your primary insurance, the benefit you will receive at full retirement age. The longer you continue to defer the application, the higher your benefits will be and the greater the impact of the annual cost-of-living adjustments.
6. Consider an annuity
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With pensions pushed aside, products called annuities have become a way to create a stream of income after retirement. You will have to sacrifice a lump sum up front in exchange for a steady stream of monthly checks in retirement.
A deferred annuity, which can generate income at a future date, can help if you’re worried about running out of money later, Moran said.
Some immediate or variable annuities, which can be checked earlier, offer attractive guarantees, Jenkin noted.
Because these contracts are binding, it helps to proceed with caution.
Make sure the fees and charges don’t go out of line, Jenkin said, and don’t buy a product pushed by someone at a dinner seminar.
“The best advice is to hire someone on an hourly rate to shop the products for you,” he said. “Don’t pay anyone a fee or commission to sell it.”
7. Plan to work a little longer
The second most preferred source of retirement income is part-time work, according to research from Goldman Sachs.
There are many advantages to that. Your income may not disappear completely when you retire. Plus, according to Moran, you can still get the social benefit of interacting with colleagues.
The extra income you earn can help you defer Social Security payments or take less from your retirement portfolio, helping your money to last longer for years to come.