Most retirement experts advise that retirees plan on securing 100 percent of their pre retirement income for retirement — though annual spending may decrease as retirees age.
However, many pre-retirees are not nearly as prepared for retirement as they had hoped—and by no fault of their own. The economic crisis, housing crash and market downturn has left many people approaching retirement also facing a large gap between the amount they have saved and the amount they will need to maintain their lifestyles in their later years.
This retirement income gap is closing for many Americans as they see investment portfolios and home values recover post-recession.
However, for the older pre-retirees, those who are closest to retirement, many are facing a gap that is still pretty hefty:
- Those ages 55 to 64 are on track to replace only two thirds of their working income, according to recent analysis by investment management solutions provider BlackRock. Yet it still won’t be enough, BlackRock finds.
- And for those who are closest to retirement, the gap is larger. Most 60-year-olds are on track to replace 64% of their median workplace income, while 64-year-olds may be able to replace only 59%.
What Can You Do to Prepare? How Can You Close the Retirement Income Gap?
There are three major options for those who are facing a major shortfall, retirement planning experts say.
“When people are behind the retirement gap, they face three choices essentially: save more, work longer, or earn a higher return on investments,” says Kirk Kinder, Certified Financial Planner and founder and President of Picket Fence Financial, based in Palm Harbor, Florida. “I never recommend increasing risk in the portfolio as that could work against retirees if the markets tumble.”
Not all of these options will apply easily to pre-retirees, however.
“It really comes down to finding more cash flow to save or working longer,” Kinder says. “It doesn’t have to be full time work. It could be part-time doing something they will enjoy. I also don’t recommend people don’t take the approach that ‘we will just cut expenses when retired.’ That is easier said than done. If people can’t do it while working, then it is tough to do in retirement.”
1. Start planning right now
It’s never too late to start planning for retirement, even if you are one of the pre-retirees facing the largest shortfall.
“It is a tough time to be a retiree or close to retirement,” Kinder says. “Interest rates are so low, and inflation is the biggest threat to a retirement. My advice to folks is to get educated and find out how to make it work. It can be done.”
Use a retirement calculator to get a starting idea of how much shortfall you are facing, or how much income you are likely to need in retirement based on current and future expenses. Consult with a retirement expert for help in starting your plan.
2. Consider new approaches
You might be able to use your income today to help boost your income tomorrow through the use of an annuity, or tap into home equity through the use of a reverse mortgage.
“Annuities will not really help erase a shortfall.” Kinder says. “Annuities can reduce the risk of money not lasting through retirement, but they don’t create extra cash flow, especially at today’s low interest rates.”
Some retirees also opt to tap into their home equity via a reverse mortgage line of credit. By taking a reverse mortgage line of credit while you are still working, you can leave the line of credit untouched and take advantage of its growth over time, giving you access to a larger line of credit down the road.
This may be advisable most in cases where a client has a lot of equity and a small income gap to fill.
“I just want to be sure that the retirees will be staying in the house, and that they don’t really care to leave the house to heirs upon their passing. If the house would be unsuitable as they age or they want the kids to get the house, I would look at alternative options,” Kinder says.
3. Keep working, keep saving and be realistic
Ultimately, retirement preparedness will come down to having a realistic idea of how much you will be spending, versus how much income you will have.
Based on the BlackRock findings, the younger you are, the higher the chances you’ll be able to get to the 80-100% replacement income level that most planners advise.
The biggest misunderstanding most retirees have has to do with spending, Kinder says.
“Most people really don’t know where their money goes,” he says. “They think they do, but they are usually spending more than they think. This often leads to them thinking they will just cut expenses at retirement. This is easier said than done.”
