Question: I've been using some online retirement tools and most indicate that my portfolio might not last throughout my retirement years. What now?
Answer: It's small comfort, but you're far from alone. According to the US 2010 Employee Benefit Research Institute Retirement Security Projection Model, 47.2% of early baby boomers (born between 1948 and 1954) were likely to have insufficient retirement income to pay for basic retirement expenditures as well as uninsured healthcare costs. The percentage risk for late baby boomers (born between 1955 and 1964) and generation Xers (born between 1965 and 1974) are 43.7% and 44.5%, respectively, according to the EBRI research.
Prospects look grave given the backdrop of economic uncertainty and the rise in both life expectancy and medical costs. But for those who aim to retire with peace of mind, there are a few key levers you can pull to ensure that your nest egg lasts throughout your retirement years. Here are the key ones:
Work Longer
Pre-retirees may not want to hear that they may need to work longer, but that has become the increasing reality for those facing shortfalls in their retirement savings. According to T.Rowe Price's studies on optimising retirement income, working at least beyond age 62 (early retirement age in the US, versus normal retirement age of around 66 at present, rising to 67) is the single best decision pre-retirees can make to improve retirement security. Continuing to work full-time could boost pre-retirees' expected inflation-adjusted annual income by about 7% for each additional year of work and contributions. Working an additional three years--from age 62 to 65--and continuing to save 15% of one's salary during that time could increase annual income from investments by 22%, as well as by 39% after working an additional five years.
Working longer allows you to contribute to your savings for a few more years while staving off the need to dip into existing savings. Under that logic, a part-time job doing something that you love would deliver similar benefits. Morningstar users attested to the philosophical and emotional benefits of working longer in a recent online discussion, written up in Your Best Piece of Retirement Advice.
Reduce Spending During Accumulation Years
One of the best ways to make up for an anticipated shortfall in retirement is to stash more away prior to retirement. And the best (and only) way to save more is to spend less. Andrew Tobias, author of The Only Investment Guide You'll Ever Need, devotes a chapter to tips on spending less. He offers practical advice, such as buying items in bulk or buying store-brand versus name-brand merchandise. He also provides warnings against common pitfalls: Don't fall for financing offers on cars because you'll end up paying more than you should; take the cash-back offer instead. Skip insurance that you don't need, such as credit life insurance (except for the elderly or terminally ill) and appliance insurance.
Moreover, setting explicit goals for where you want to be financially a year from now, having a clear understanding of your net worth and annual earnings, and carefully tracking your expenses are essentials to effective penny pinching. See more in Your 2011 Financial Planning Calendar.
Reduce Planned Expenses in Retirement
In addition to cutting costs to save more during the accumulation phase, pre-retirees can also make their nest eggs last by ratcheting down their planned expenses during their retirement years. Of course, that trade-off may not be palatable: According to a Center for Retirement Research study at Boston College, most retirees are willing to work longer rather than save more or reduce their standard of living in retirement.
However, it may be possible to cut some costs--by downsizing to a smaller home, for example--without sacrificing quality of life. Just be realistic about what you'll actually be able to save after you've retired. While expenses for work clothes and commuting will go down in retirement, other expenses, such as medical and travel costs, might be much higher than they were pre-retirement.
The conventional rule that you need to prepare to receive 80% of your in-employment income during retirement for a 'successful' retirement has often been disputed, as in Morningstar's John Rekenthaler article The 80% Myth.
Reallocate Your Assets
If you're nearing retirement, a portfolio that is too conservative is just as risky as one that is too aggressive, particularly when you consider the drag of inflation and taxes. In general, the best way to kick up the longer-term return potential of your portfolio is to increase your stock allocation, but do so judiciously: Adding stocks will also jack up your portfolio's volatility level. Read more in Portfolio Management for Investors in Retirement.
