For most adults reaching retirement age, finances are looking pretty grim. By most studies, more than half of the Baby Boomer generation isn’t financially prepared for retirement, and as many as 30% have no retirement savings at all. Experts are worried about how new retirees will fare, or if retirement as we currently think of it will even still exist. So if savings can’t save the day, what can?
Why Do You Need It?
While many of the people who have been retired for a while have managed to maintain their nest egg while enjoying pre-retirement lifestyles and spending habits, younger retirees and adults approaching their full retirement age shouldn’t count on the same fortune. Americans nearing retirement have a median retirement savings of about $147,000, which is more than $500,000 shy of the amount that experts project is necessary for a comfortable, financially stable retirement.
Sources of retirement income are one way that current and future retirees are dealing with their finances. From estimated medical costs as high as $280,000 to cost of living to travel and entertainment, there’s so many aspects of retirement that require financial security. So what can you do?
What Are Your Options?
1. Social Security
The in’s and out’s of Social Security can be difficult to navigate. If you’ve already claimed your benefits and have been receiving monthly payments for a year or more, the amount you can receive each month is more or less locked in aside from cost-of-living increases. If you haven’t claimed yet, or if you’ve been receiving benefits for less than a year, you have some choices to go over with your financial advisor.
First, the age at which you claim benefits has a huge effect on how much money you’ll receive each month. At the minimum age of eligibility, 62, your benefit could be reduced by as much as 25-30%, depending on your full retirement age (FRA). Then, at your FRA, you can receive your full benefit with no reductions. Or, for every year you wait to claim after your FRA and up to age 70, you can earn an 8% bonus to your benefit. Everyone’s situation is different, so one age is not necessarily always better than another, but many financial planning experts advise waiting and betting bonuses if your health and financial situation will allow.
2. Employer Pensions
Today, employer pensions are becoming rare, but they do still exist. Public service workers, such as the police force, firefighters, judges, and public teachers have always had pension plans, and other government positions also offer pensions. Because pensions are part of an employee’s compensation package, the amount of retirement income they provide varies based on industry, position, and even from person to person.
3. Retirement Accounts
While you can open your own retirement accounts, they are generally associated with employer-provided benefits. These benefits, such as 401(k)s, 403(b)s, deferred comp plans, SIMPLE or SEP IRAs, and more, may not be income like pensions are, but function in much the same way after retirement. You are required to withdraw a minimum amount per year after age 70½, though earlier withdrawals may help reduce your lifetime tax bill. Transfers can be done in a lump sum (though we don’t recommend it), quarterly, monthly, or on a different schedule as long as the minimum is met annually.
4. Savings Accounts
Your personal savings aren’t actually guaranteed income, but barring emergency expenses, you should treat money you withdraw about the same as you treat Social Security payments or retirement account withdrawals. Budget your spending and pay yourself a monthly paycheck from your savings account, and don’t go over that budget. The main difference is that you can withdraw more money if you need to, in case of an emergency medical expense for example, whereas other sources of retirement income generally pay out a regular amount that you have little to no control over.
Annuities are somewhat unique in this list, as they can be obtained after you’ve already retired, and some, like fixed indexed annuities, have the option to be truly guaranteed retirement income, meaning that you will always receive income from them regardless of your financial situation, the markets, and other variable factors. There are different types of annuities that may be better or worse for your needs, which you should discuss with a financial advisor.
6. Part-Time Work
And of course, one way to earn retirement income is simply by earning income from a job. There are many part-time work opportunities that allow retirees to supplement their savings while still maintaining a retirement lifestyle, and more retirees are becoming entrepreneurs for enjoyment and income. Continuing to work isn’t part of the traditional picture of retirement, but it’s quickly becoming more common.
While retirement savings across the board aren’t where they should be, a financially stable retirement is possible with enough planning. Take stock of your options for retirement income, and speak with a financial advisor to get the clearest picture of your finances.