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To maintain your standard of living in retirement, the general rule is that you must be able to replace at least 70% of the income you had while you were working.
But many retirees are not meeting that retirement income goal, according to research by Goldman Sachs Asset Management. The survey interviewed 1,566 U.S. participants between July and August 2022.
Only 25% of retirees generate that amount of income, according to company research. Meanwhile, more than half of retirees — 51% — are getting by on less than 50% of their pre-retirement income.
The gap is not surprising considering that more than 40% of people who are still working say they are behind on their retirement savings. Gen Xers – who are sandwiched between millennials and baby boomers – were the most likely to say they were late to retirement, at more than 50%.
Conflicting life goals and financial priorities — a so-called financial vortex — can get in the way of how savers balance other roles as parents or caretakers and as landlords or renters.
“You have all these competing priorities that can crowd out retirement savings,” said Mike Moran, senior pensions strategist at Goldman Sachs.
If you’re still working, there are steps you can take to dramatically increase your cash flow in your later years and improve your chances of reaching that 70% income replacement rate.
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1. Downsize your lifestyle
By reducing your cost of living now, you will need less income in retirement. Ask yourself if you’re spending less than you’re earning, suggested Sharon Carson, retired strategist at JP Morgan Asset Management.
“If you haven’t already, this is the perfect place to start,” 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 cleanup to help people cut spending.
For 21 days, shop every bill in your household to see if you can get a better deal.
2. Increase your savings
Even if your budget is tight, increase the amount you set aside for retirement by just 1% of your salary can go a long way when you eventually need to withdraw that money.
As a general rule, you should spend 15% of your salary on retirement, according to retirement experts at JP Morgan Asset Management. This may include business correspondence, if you have one.
You can’t hit 15% right away.
“Look at what you can do each year,” Carson said. “If you can do something, you have the long-term composition advantage.”
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. It is estimated that as many as 57 million Americans do not have access to a workplace retirement savings plan.
You can still contribute to an Individual Retirement Account with pre-tax money or with after-tax money through a Roth IRA. Some restrictions apply. For example, there are certain limits on pre-tax contributions if a spouse has a work plan, and the after-tax Roth contributions depend on your income.
Many states are also stepping up efforts to offer retirement savings programs to workers who don’t have access to employer plans.
4. Stay invested
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The top source of retirement income preferred by retirees surveyed by Goldman Sachs was investments, Moran said. To get more income from your portfolio, you might 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.
Of course, the losses hurt. But trying to time the market can be a losing battle, especially because the market’s worst days tend to be closely followed by their best days.
“If you’re trying to time the market, you have to be right twice,” Carson said.
5. Delaying Applying for Social Security Benefits
The longer you wait to claim Social Security retirement benefits until age 70, the bigger your monthly checks will be.
You can apply from the age of 62, but your benefits will be reduced.
At full retirement age – between 66 and 67, depending on your date of birth – you will receive the full benefits you have earned.
For each year of delay beyond this age, up to age 70, you can receive an increase of up to 8%.
It’s still smart to wait, even with a historically high cost-of-living adjustment of 8.7% this year, experts say.
The COLA increases what is called your primary insurance amount, the benefit due to you at full retirement age. The longer you continue to delay your application, the higher your benefits will be and the greater the impact of annual cost of living adjustments.
6. Consider an annuity
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As pensions have been phased out, products called annuities have become a way to create a stream of income in retirement. You’ll have to sacrifice a lump sum of money up front in exchange for a steady stream of monthly checks in retirement.
A deferred annuity, which can provide income at a later date, can help if you’re worried about running out of money later, Moran said.
Some immediate or variable annuities, which can provide earlier checks, offer attractive guarantees, Jenkin noted.
Since these contracts are binding, it helps to proceed with caution.
Make sure the fees and costs aren’t excessive, Jenkin said, and don’t buy a product pushed by someone at a dinner seminar.
“The best advice is to hire someone for an hourly rate to go buy the products for you,” he said. “Don’t pay anyone a fee or commission to sell it.”
7. Plan to work a little longer
The second favorite source of retirement income is part-time work, according to Goldman Sachs research.
There are many advantages to this. Your income may not disappear entirely when you retire. Plus, you can still get the social benefit of interacting with co-workers, according to Moran.
The extra income you earn can help you delay Social Security benefits or withdraw less from your retirement portfolio, helping to ensure your money lasts longer for years to come.