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.
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1. Downsize your lifestyle
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 of CNBC’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.
2. Nudge your savings higher
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.”
3. Find ways to save outside of work plans
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 Americans lack access to 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.
4. Stay invested
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.
5. Delay claiming Social Security benefits
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%.
The COLA increases what is known as your primary 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.
6. Consider an annuity
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.”
7. Plan to work a little longer
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.