As you plan for retirement, you may find that you do not have as much money as you need. If that’s the case, something needs to change, but the changes might not be as painful as you think. To be sure, it won’t be easy and it won’t be fun, but there might be some things you can do to get an acceptable retirement.
When most people face a shortfall in their retirement savings, they think of ways to solve the problem. But they generally only think about one thing at a time: saving more money, or working longer, for example. Those approaches could solve the problem, but they would probably require drastic changes (such as saving 80% of your pay, or working until age 97). Is there a better way?
Mix and combine strategies for best results
If you combine several different strategies, you might be able to make less drastic changes and eventually end up with a retirement that’s pretty close to what you wanted. In other words, you don’t need to rely on just one strategy – and even if you tried to use just one strategy, it might not work anyway. Attacking the problem from several different angles allows you to shave a little here and add a little there (as opposed to making one enormous change).
Strategies to Overcome a Retirement Shortfall
Unfortunately, there is some limit to the strategies available to you. Furthermore, some of these strategies might not be an option for you, or they might be a better option for somebody who’s younger than you. Whether or not you can use these approaches (or if you can only use them to a small extent) it’s helpful to explore them and see if they can make some small contribution towards fixing your retirement shortfall.
If you boil it down, you might say that there are four ways to solve your retirement shortfall:
- Save more each month
- Delay retirement
- Lower your standard of living in retirement
- Earn more on your investments
This may not seem like much to work with, but there are a number of ways that you can use each strategy that might not immediately come to mind. At some point, you may just have to choose the cleanest dirty shirt in the closet (or the lesser of all evils).
Saving More
Saving more is the “brute force” way of fixing a retirement shortfall. It is the simplest, safest, and most certain way of improving your financial position. It’s not the only way to make your retirement dreams come true, but it is probably the best way. When you use a retirement calculator, saving more money is probably the first suggestion you’ll get. But if you find that the amount you’d need to save is way off the charts, then there’s a good chance that you’ll need to combine that strategy with several other strategies.
Saving more is, of course, easier said than done. You’ll typically have to cut your spending in order to pull it off. For some people, there’s just no room in the budget to save more, but you should take a long hard look at your spending before you decide that you’re one of these people. If you don’t already do it, track every penny you spend for at least one month. When you can look at your spending with the benefit of hindsight (was that night on the town really worth $150? Is it worth it every week?), you can see where you might free up some money for retirement savings. You probably cannot save your retirement just by skipping inexpensive treats (the “latte factor,” for example), but you might find some surprising ways to save money.
If you’re having a hard time saving, try to eliminate any temptation to spend what you need to save. Set up automatic contributions to your 401k plans, or find some other way to get money out of sight (and out of mind) so that you’ll have more later.
Working Longer
Working for a few extra years is another powerful way to fix a retirement shortfall. When you work longer, you reduce the number of years that you’ll need to spend down your assets in retirement. In addition, you have a few extra years to save – typically your highest earning years at the end of your career – so you can beef up your retirement resources.
Working part-time is a variation on this theme. Again, the idea is to do “some” of each strategy and combine strategies – not just work until the day you die. If you work part-time, you can reduce the amount of your savings that you’ll spend in any year that you work. That allows you to keep more of your money saved and invested for later, when you can really retire and pay yourself what you want. Working part-time might also help you save on healthcare expenses. Think of your job in terms of how much it saves you (how much you don’t have to spend on health insurance, for example) as opposed to just how much it pays you.
Living with Less
Another way to make the numbers work is to reduce the amount of income you want in retirement. That might be unappealing, but again, the idea is to adjust this number modestly while making other changes as well (such as increasing your savings before retirement). It’s hard to have too much income in retirement – especially with unknowns related to health care and aging – but make sure you review your goals to see if you really need as much income as you think you need.
As you decide how much to pay yourself in retirement, remember that you don’t necessarily have to have the same standard of living for the entire time. If you’re especially concerned about healthcare costs, you might pay yourself a modest amount in the early years of retirement (when you’re likely to be in better health) and then plan to give yourself a substantial raise at a certain age (of course, you should give yourself a small raise every year just to keep up with inflation). Or you can do it the other way around: pay yourself a high salary in the early years (when you’ll really enjoy it) and plan to live on less at some point in the future (if you even make it that long).
Earning More on Investments
Depending on how long your money will be invested, you might benefit from higher returns on your investments. However, this strategy is extremely dangerous: trying to earn more means taking more risk. You might earn more, or you might lose more than you were otherwise going to lose. You should only attempt this if you can tolerate the risks, and if you can survive (happily) if you lose money.
Earning more is probably only a reasonable option for younger people with at least 10 years to go until retirement. A 35-year-old who is invested conservatively might find that it’s easier to reach her retirement goals if she switches to moderate or moderately aggressive investments. Higher investment returns over the course of many years can produce dramatic results. However, if you only have four years to go until retirement, this strategy would probably be reckless.
That said, there might be room for a small amount of risk in retirement. If you call it quits at age 65, you might live for another 30 years, and it might make sense to have some portion of your money invested in the stock markets. That might only be 10% or 25% of your nest egg, but that small amount might bump up your returns slightly and help your money keep up with inflation.
Fixing a Retirement Shortfall
If it doesn’t look like you’re on track for retirement, figure out how you can use a variety of strategies to solve the problem. Using just one technique (saving more each month) will be extremely difficult. If you can chip away at things in several different ways, you’ll have a better chance of reaching your goals.
Photo credit: Jill