One of the main reasons retirees come up short is pretty simple: They didn’t save enough and underestimated their spending in retirement.
According to a recent survey by Global Atlantic, “nearly two in five (39%) U.S. retirees are spending more than they expected and just under one-half (49%) of pre-retired consumers (ages 40+) believe planning for retirement is more difficult for them than it was for their parents.”
Why the disconnect between retirement planning and spending? Many retirees fail to estimate how much their out-of-pocket will be on health care and housing. While some have guaranteed pensions, they still may underestimate the rising cost of everything from home maintenance to prescription drugs. Social Security isn’t enough for most.
“Financial planners have traditionally used the analogy of a three-legged stool to discuss retirement planning; the three legs symbolized Social Security, pensions and personal savings,” Paula Nelson, president, retirement at Global Atlantic, said.
“However, as pensions gradually disappear, personal savings are often insufficient and uncertainty around Social Security grows, these three legs are increasingly seen as inadequate, leaving individuals and their advisors searching for other income sources.”
There’s much you can do. Here are five suggestions:
1. How Much Do You Realistically Expect to Spend in Retirement?
To be honest, you need to detail a list of items in a mini-spreadsheet based on current and future spending. This is best done in a calculator.
2. How Much Will Your Kitty Last Given Your Retirement Spending Projection?
Again, online calculators will do the math for you. You may have to make some changes such as reducing your spending or changing your portfolio.
3. Change Your Portfolio Mix
Adding more stocks will help. Of course, you’re taking more risk, but you’re also likely to beat inflation. Bonds and cash will not keep up with the cost of living. A good place to start is a 60% stocks, 40% bonds mix if you’re under 50.
4. Save More
This is the simplest solution. Compound interest works for you over time. If you can boost your 401 (k) contribution, you’ll see the difference. If your default rate on your 401(k) is 4%, bump it up to 6%. Better yet, notch up your contribution automatically every time you get a raise. Then you won’t have to think about the decision.
5. Work Longer
Of course, keeping your money invested in a retirement plan over a longer period of time is the simplest math ever. Here’s another bonus: If you wait to collect Social Security until you’re age 70, you’ll reap the highest possible benefit (based on your lifetime earnings).
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