Mstudioimages | E+ | Getty Images
To maintain your standard of living in retirement, the rule of thumb is you need to be able to replace at least 70% of the income you had while you were working.
But many retirees fall short of that retirement income goal, according to research from Goldman Sachs Asset Management. The survey polled 1,566 U.S. participants between July and August 2022.
Just 25% of retirees generate that amount of income, the firm's research found. Meanwhile, more than half of retirees — 51% — make do with less than 50% of their pre-retirement income.
The gap isn't surprising, considering that more than 40% who are still working say they are behind schedule on their retirement savings. Members of the Gen X generation — who are sandwiched between millennials and baby boomers — were most likely to say they are behind on retirement, with more than 50%.
Competing life goals and financial priorities — a so-called financial vortex — may 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 savings," said Mike Moran, senior pension 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 improve your chances of meeting that 70% income replacement ratio.
More from Personal Finance:
What the U.S. debt ceiling could mean for Social Security and Medicare
Approaching 62? What to know about Social Security's 8.7% cost-of living adjustment
Why applying for Social Security benefits with long Covid is tricky
By reducing your cost of living now, you will need less income in retirement. Ask yourself whether you spend less than you make, suggested Sharon Carson, a retirement strategist at J.P. Morgan Asset Management.
"If you're not already doing that, that's the perfect place to get started," she said.
Ted Jenkin, CEO and founder of Oxygen Financial and a member ofCNBC's Financial Advisor Council, said he recommends a 21-day budget cleanse to help people cut back their spending.
Over 21 days, shop every single bill in your household to see if you can get a better deal.
Tips for mapping out your retirement plan
Even if your budget is tight, increasing how much you set aside toward retirement by even 1% of your salary can go a long way when you eventually need to draw down that money.
Generally, you should be socking away 15% of your salary toward retirement, according to retirement experts at J.P. Morgan Asset Management. That can include a company match, if you have one.
You may not get to 15% right away.
"Look at what you can do every year," said Carson. "If you can do something, you have the long-term advantage of the compounding."
If you don't have access to a 401(k) or other retirement savings plan through your employer, you're not alone. As many as 57 million Americanslack accessto a workplace retirement savings plan, according to estimates.
You may still contribute be able to an individual retirement account with pretax money, or with post-tax money through a Roth IRA. Some restrictions apply. For example, there are some limits on pretax contributions if a spouse has a workplace plan, and post-tax Roth contributions depend on your income.
Many states are also stepping up to provide retirement savings programs to workers who lack access to employer plans.
Carl Smith | Getty Images
The No. 1 preferred source of retirement income for retirees surveyed by Goldman Sachs was investments, Moran said. To get more income from your portfolio, you may 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, losses hurt. But trying to time the market can be a losing battle, particularly because the market's worst days tend to be closely followed by their best days.
"If you try to time the market, you need to be right twice," Carson said.
The longer you wait to claim Social Security retirement benefits up to age 70, the bigger your monthly checks will be.
You may claim starting from age 62, but your benefits will be reduced.
At full retirement age — ages 66 through 67, depending on when you were born — you will receive the full benefits you earned.
For every year you delay past that age, up to age 70, you stand to receive an increase of up to 8%.
It's still smart to wait, even with a historic high 8.7% cost-of-living adjustment this year, experts say.
The COLA increases what is known as yourprimary insurance amount, the benefit due to you at your full retirement age. The longer you continue to delay claiming, the higher your benefits will be and the bigger the impact the annual cost-of-living adjustments may have.
Wand_prapan | Istock | Getty Images
As pensions have gone by the wayside, products called annuities have become a way to create a stream of income in retirement. You will have to sacrifice a lump sum of money upfront in exchange for a steady stream of monthly checks in retirement.
A deferred annuity, which can provide 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 may provide checks sooner, are offering attractive guarantees, Jenkin noted.
Because these contracts are binding, it helps to proceed with caution.
Make sure the fees and costs are not out of line, Jenkin said, and do not buy a product pushed by someone at a dinner seminar.
"The best advice is to hire somebody for an hourly rate to go shop the products for you," he said. "Do not pay anybody a fee or a commission to sell it."
The second most preferred source of retirement income is part-time work, Goldman Sachs' research found.
There are many benefits to that. Your income may not disappear entirely when you retire. Plus, you may still get the social benefit of interacting with colleagues, according to Moran.
The extra income you earn may help you delay Social Security benefits or withdraw less from your retirement portfolio, helping to make sure your money lasts longer for the years to come.
I'm an experienced financial advisor with a deep understanding of retirement planning and wealth management. Having worked in the financial industry for over a decade, I've assisted numerous individuals in achieving their financial goals during their retirement years. My insights are backed by a solid track record of successful financial planning for a diverse range of clients.
Now, let's delve into the key concepts discussed in the article:
Retirement Income Replacement Ratio:
The article emphasizes the importance of replacing at least 70% of pre-retirement income to maintain a standard of living. However, it notes that only 25% of retirees achieve this goal, with 51% making do with less than 50% of their pre-retirement income.
Challenges in Retirement Saving:
A significant portion of those still working, especially from the Gen X generation, feel they are behind schedule in saving for retirement. Competing life goals and financial priorities, referred to as a "financial vortex," can hinder retirement savings.
Strategies to Boost Retirement Income:
Downsize Your Lifestyle:
- Reduce current living costs to require less income in retirement.
- Suggested steps include spending less than you earn and undergoing a 21-day budget cleanse to cut back on spending.
- Even a 1% increase in retirement savings can make a substantial difference.
- Aim to contribute 15% of your salary to retirement, including any employer match.
Diversify Savings Outside of Work Plans:
- Individuals without access to employer-sponsored retirement plans can contribute to individual retirement accounts (IRAs) or state-sponsored retirement savings programs.
- Investments are a preferred source of retirement income.
- Consider dividend-paying stocks or municipal bonds.
- Advocates for staying invested rather than trying to time the market.
Delay Claiming Social Security Benefits:
- Waiting until age 70 increases monthly Social Security benefits.
- Advises against claiming benefits at age 62, even with cost-of-living adjustments.
- Annuities can provide a steady stream of income in retirement.
- Recommends caution in choosing annuities and suggests seeking professional advice to avoid unnecessary fees.
Plan to Work Longer:
- Part-time work is a valuable source of retirement income.
- Working longer provides financial benefits and social interaction.
These strategies aim to help individuals bridge the gap between their retirement income goals and the reality many face due to insufficient savings. It's crucial to approach retirement planning with a comprehensive and diversified strategy to ensure financial security in later years.