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In order to maintain the standard of living in retirement, the rule of thumb is that you can replace at least 70% of your income from work.
But many retirees are loudly missing that retirement income target research by Goldman Sachs Asset Management. The survey polled 1,566 US respondents between July and August 2022.
Only 25% of retirees generate this level of income, the company’s study found. More than half of retirees – 51% – now get by on less than 50% of their pre-retirement income.
The gap is not surprising given that more than 40% of those still working say they are behind on their retirement savings. Generation Xers — sandwiched between Millennials and Baby Boomers — were the most likely to say they are behind in retirement, at over 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 caretakers and as homeowners or renters.
“You have all these competing priorities that can crowd out retirement planning,” said Mike Moran, senior pension strategist at Goldman Sachs.
If you’re still working, there are steps you can take to significantly increase your cash flow in your later years and improve your chances of achieving that 70% income replacement rate.
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1. Downsize your lifestyle
By lowering your cost of living now, you’ll need less income in retirement. Ask yourself if you’re spending less than you’re taking in, suggested Sharon Carson, fixed income strategist at JP Morgan Asset Management.
“If you’re not already doing that, this is 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 it is recommending a 21-day budget purge to help people cut spending.
Buy every single 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, you can add as much as 1% of your salary to your retirement savings can go a long way when you eventually have to withdraw that money.
In general, according to pension experts at JP Morgan Asset Management, you should spend 15% of your salary on retirement. This may include a company match if you have one.
You may not reach 15% immediately.
“Look at what you can do each year,” Carson said. “Anyone who can do something has the long-term advantage of compounding.”
If you don’t have access to a 401(k) or other retirement plan through your employer, you’re not alone. Up to 57 million Americans do not have access to a company pension plan, according to estimates.
You can continue to pay pre-tax money or post-tax money into an individual retirement account through a Roth IRA. Some restrictions apply. For example, there are some limitations on pre-tax contributions when a spouse has a workplace scheduleand post-tax Roth contributions depends on your income.
Many states are also making efforts to provide retirement plans for employees who do not have access to employer plans.
4. Stay invested
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The #1 preferred source of retirement income for retirees surveyed by Goldman Sachs is investing, Moran said. To get more income out of your portfolio, consider dividend-paying stocks or municipal bonds, he said.
The key is to stay invested and not dump your money in and out of the market, Carson said.
Admittedly, losses hurt. But trying to time the market can be a losing battle, especially as the market’s worst days tend to be closely followed by their best days.
“If you’re trying to time the market, you have to get it right twice,” Carson said.
5. Delay claiming Social Security benefits
The longer you wait to claim Social Security retirement benefits by age 70, the larger your monthly checks will be.
You can claim from age 62, but your benefits will be reduced.
When you reach full retirement age – between the ages of 66 and 67, depending on your date of birth – you will receive the full benefits you deserve.
For every year you delay beyond that age, up to age 70, you receive an increase of up to 8%.
It’s still wise to wait, even with a historically high 8.7% cost-of-living adjustment this year, experts say.
The KOLA increases your so-called primary insurance sum, the benefit to which you are entitled at full retirement age. The longer you delay applying, the higher your benefits and the greater the impact of annual cost-of-living adjustments can be.
6. Consider an annuity
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Since pensions have fallen by the wayside, Products called annuities have become a way to create an income stream in retirement. You have to sacrifice a lump sum of money upfront to get a steady stream of monthly checks in retirement.
A deferred annuity that can bring income at a later date can help if you’re worried about running out of money down the road, Moran said.
Some instant annuities or variable annuities that may offer early checks offer attractive guarantees, Jenkin noted.
Because these contracts are binding, it helps to tread carefully.
Make sure the fees and expenses aren’t out of the ordinary, Jenkin said, and don’t buy a product someone is pushing at a dinner seminar.
“The best advice is to hire someone on an hourly basis to buy the products for you,” he said. “Don’t pay anyone a fee or commission for the sale.”
7. Plan to work a little longer
The second most popular source of income for retirement is Part-time work, Goldman Sachs research found.
This has many advantages. Your income may not completely disappear when you retire. Plus, according to Moran, you can still get the social benefits of interacting with co-workers.
The extra income you earn can help you defer Social Security benefits or take fewer withdrawals from your retirement portfolio, ensuring your money lasts longer for years to come.
https://www.cnbc.com/2023/01/21/retirees-fall-short-on-retirement-income-replacement-ratio.html Retirees have a low retirement income replacement ratio