“Most retiree accounts are woefully underfunded. Instead of withdrawing 4% to retire comfortably, you may have to reduce that to 3% or less.” Jeff Kennedy
For various reasons, some people over 65 end up experiencing poverty in retirement. Working too short a time, poor health, and caregiving responsibilities may limit covered earnings.
Inflation, longevity, and market risk may impact even the most robust retirement accounts. Some of the most vulnerable seniors count only on Social Security minimum benefits to provide them with a basic income. However, amid real worries about Social Security’s solvency, government experts are proposing solutions ranging from increasing the retirement age, cutting benefits, raising taxes, or all of these.
Such initiatives could potentially improve the odds of Social Security viability. Still, these solutions may be too little too late for a lot of retirees and pre-retirees. The average annual income gap for those leaving the workforce in 2065 is projected to be around $13,000. To close this gap, a retiree will need to save an estimated $272,000 or more, based on 20 to 25 years of retirement.
That’s why, instead of waiting for the government to enact structural reforms to the retirement system, those within 5-10 years of retirement would be wise to begin making some changes themselves right now.
The politicization of retirement issues has resulted in the government’s inability to enact feasible, meaningful reforms that could protect against some of the effects of outliving your money. Barring such potentially unpopular reforms to Social Security and changes to Americans’ savings habits, most experts say a significant amount of seniors will run out of money early during their retirement years.
Fortunately, even in these precarious times, there are some actions you can take to ensure you don’t encounter cash flow issues when you stop working.
- Plan and prepare for the worst-case scenario. A shocking number of pre-retirees have never met with a financial professional at all. Yet, having a written plan that contemplates longevity risk, sequencing risk, tax hikes, and other assaults on your retirement assets is essential. It’s always better to be “prepared instead of scared.”
- Work longer if possible. Just because you’re leaving a career you may have had for 25 or more years doesn’t mean you have to exit the working world completely. Consider a side gig or start a small business, preferably doing something you enjoy or have always wanted to do. Not only will this give you greater cash flow, perhaps delaying the need to tap into your retirement savings, but your mind will also stay sharper.
- Monitor and adjust your portfolio more frequently. Challenging economic times make it necessary to pay more attention to your retirement portfolio. Don’t leave your brokerage statements unopened on the table. Check your investments consistently and speak with your advisor if you feel rebalancing is in order.
- Consider purchasing an annuity or other safe money product. If having a stream of guaranteed lifetime income appeals to you, you may want to take a closer look at safe money products, particularly annuities. An annuity can also protect your principal investment and create a legacy for your loved ones. Some annuity products also give you a long-term care option to help offset nursing home costs not covered by Medicare.
Summing it up: As our economy weakens into a recession, it will be necessary for retirees and those thinking of retiring to reassess their situations and add income streams to bolster their savings. The same strategies used to accumulate your nest will not be sufficient to create dependable income when you no longer work. Talk to your advisor about whether adding an annuity to your retirement plan makes sense in your situation.