Boost Your Nest Egg in the Retirement Homestretch
All is not lost for those who start saving fiercely later in life.
With the calendar flipping to 2018, many preretirees are hoping that retirement is now one year closer. If you’re heading into the homestretch toward your retirement date, it’s time to critically assess your nest egg. And if you are already in retirement, find the time for an annual checkup on your financial health. Will you be able to fund a couple of decades out of the workforce? If you are worried your nest egg isn’t up to the task, there are strategies you can use to bolster your retirement savings and ensure your money lasts as long as you do.
First, figure out where you stand. Gather the latest statements from all your retirement accounts, and get an estimate of what your Social Security benefit will be and any pension income you expect. The closer you are to retirement, the more exact these figures will be. If you are a good decade or so away from retirement, some of your income numbers will be projections. You’ll need to update the numbers at least every few years before you actually retire.
Then devise a budget for living in retirement. Cover all the essentials, and consider how much discretionary spending you’d like to figure in. Then compare your assets and income to your expected liabilities and expenses.
If you discover a gap, you’ll want to save more, spend less and create more income—both now and for retirement. With those overarching goals in mind, next look at the levers you can control to boost your nest egg. No one strategy is a silver bullet, says Robert Steen, advice director for retirement and complex planning for USAA, in San Antonio, Tex. But a combination of moves could unlock the door to a fully funded retirement.
Max Out Retirement Accounts
Save, save and then save some more. Nothing beats setting money aside to fund your future. And the government offers extra tax incentives when you hit age 50. In the year you turn half a century, your birthday gift is permission to put in up to $1,000 more in an IRA and up to $6,000 more in a 401(k) or other defined-contribution plan.
Turbocharging your retirement savings can make a big difference. Invest the maximum $24,500 in 2018 into your 401(k) at age 50, and if that contribution earns 6% a year for the next 15 years, it will more than double, to about $59,000. Add in $24,500 every year until you retire at, say, age 67, and you’ll have about $725,000 in your nest egg, even if you had zero savings before you started maxing out at age 50. If both spouses of a married couple max out in that same time frame, that’s a nest egg worth about $1.45 million. No doubt the earlier you start saving, the more you’ll have—but all is not lost for those who start saving fiercely later in life.
Don’t let the idea of stashing away nearly $25,000 every year scare you away. Get creative and look for ways to trim your budget to save more, whatever amount you can afford. “Sock aside as much as you possibly can,” says Larry Jones, financial planning manager for Huntington Private Bank, which is headquartered in Columbus, Ohio. If you can’t do the full amount, try for two-thirds, for instance. You can always dial back contributions if you find your home-stretch stretch is putting too much pressure on your everyday budget.
But by saving more, you’ll also get a preview of what it’s like to live on a smaller monthly amount. “This gets you in the habit of being on a tighter budget,” says Steen. You may hardly notice, or you may find it painful. Better to find out now while you still have a paycheck and some time to course correct than to find out years down the road after you’ve left the workforce.
Bring In Some Income
You may find that an easy way to boost your nest egg is to delay your retirement, says Sri Reddy, senior vice president and head of full service investments at Prudential Financial. You can continue to save more for longer, while also cutting the number of years in retirement you have to fund. Waiting two or three years could make a big difference.
If delaying retirement isn’t in the cards, consider phasing into retirement. Cut back on hours or days in the office if your company offers that flexibility.
But if you really want to leave the rat race, perhaps you can switch to a part-time job in a field you enjoy. “If you can earn $20,000 to $25,000, that makes a big impact on drawdown,” says certified financial planner Robert DeHollander, of DeHollander & Janse Financial Group, in Greenville, S.C.
Marguerita Cheng, chief executive officer of Blue Ocean Global Wealth, in Gaithersburg, Md., says one of her clients had to retire from her full-time job sooner than expected to take advantage of an offer for retiree health benefits, but the client has continued to work part-time several days a week.
And don’t forget to look at the income that your portfolio is generating. You may need to tweak your asset allocation to make sure your money is working harder for you. But you also need to be careful about taking too much risk late in the game, so as to avoid getting burned by a market downturn (see Fend Off the Risk of Bad Returns.)
If the market takes a dive while you’re still working, it’s a paper loss, says Paul Danziger, president of Freedom Financial Advisors, in Bethesda, Md. You can leave your money invested in the market where your assets can recover, because you have your incoming paychecks to rely on. But if you have to sell when the market is down just to pay your bills, it’s a different story because you are locking in that loss. “At retirement, you no longer have a paper loss—it’s a real loss if you have no paycheck,” he says.
To mitigate that risk, consider divvying up your portfolio into buckets, a strategy that DeHollander says his firm uses. Buckets one and two hold more-conservative investments to help pay immediate expenses and ride out periods of volatility, while bucket three holds longer-term investments, such as stocks that can be held for 15 years or more. “You don’t want to be so conservative that you don’t get growth,” he says.
Also review your investment costs and tax efficiency of your portfolio. The less money you pay in fees and taxes is more money that will go in your pocket.
Review your spending, and start whittling. “Higher than appropriate spending early on [in retirement] can be detrimental 20 to 25 years out,” says Jones. Look for areas where you can cut back in your current budget and in your projected retirement spending.
Many experts suggest looking to housing to free up money, since the ongoing costs can be a big part of monthly expenses and a home is often the biggest asset people own. Downsizing to a smaller house might let you pay less in utility bills, property taxes or insurance. For some people, though, refinancing a mortgage might make sense. Cheng says a client shaved nearly $400 off her mortgage payment by refinancing, which made a big difference in her quality of life in retirement, albeit with the tradeoff of extending the term.
If you’re thinking of moving to a new location in retirement, research cost of living and taxes for areas you consider. Moving to a state with lower costs could save you a bundle and allow a nest egg to stretch further. Cheng worked with a couple who reduced their housing costs from $4,200 a month in northern Virginia to $1,400 a month in Florida, a change that was the key to allowing them to retire sooner rather than later. “We would love people to save more, but if you neglect the expense side, you’re missing an opportunity,” says Cheng.
One resource that can help: Kiplinger’s recently updated State-by-State Guide to Taxes on Retirees. You can compare how taxes stack up in different states, as well as check out our top ten picks for the most tax-friendly and least tax-friendly states for retirees.
Another area to potentially trim is transportation costs—perhaps you can take public transportation, go from two cars to one, or buy a cheaper or more fuel-efficient car. And take a critical look at discretionary spending—maybe cut back on dinners out or take one less big trip per year. You might also consider reducing support to family, such as grown kids. “Have that talk with the 40-year-old in the basement,” says Steen.
You can also cut costs by reducing your debt burden. Every dime you pay in interest is a dime you don’t have for something else. Whittle down car debt and credit card debt, and even any remaining student loan debt. Tackle paying down your mortgage if that’s your only debt. “It makes life simpler to be debt free in retirement,” says Steen.
Delay Social Security
With interest rates still low, it’s hard to buy a better annuity than the one you can get from Social Security. For every month you wait after age 62 to collect benefits, the size of your benefit increases.
How much? Benefits at age 70 are 76% higher than at age 62. And Social Security payouts, which will last for the rest of your life, are annually adjusted for inflation.
For married couples, at least consider having the higher earner delay as long as possible. That higher earner’s benefit will be the one that lasts the lifetime of the second spouse to die. So even if the higher earner dies at 71, if his spouse lives until, say, 96, his higher benefit will have lived 25 years longer. The surviving spouse receives 100% of what the higher earner was receiving, or was eligible to receive, at the time of his death.
And keep in mind that delaying Social Security doesn’t mean you have to keep working until age 70. While it might be easier to delay if a paycheck is rolling in, look for ways to cover the difference temporarily if you want to retire earlier. For example, you might consider tapping a traditional IRA. You’ll soon have to take required minimum distributions anyway, and by tapping it earlier, you’ll lower future required minimum distributions when you have Social Security money coming in.
Consider an Annuity
There are a couple of ways that an annuity product can plug an income gap in a retirement budget. One approach is to buy an immediate annuity, trading a lump sum for an insurance company’s promise of a set amount of monthly income for life. Let’s say you have a $500 monthly gap between your projected income and your essential expenses. A 65-year-old man could buy a single life immediate annuity for about $93,000 that would throw off monthly lifetime payments of $505, according to a recent quote on ImmediateAnnuities.com.
Or you could shorten the time horizon your nest egg has to provide for all your needs by buying a deferred-income annuity, forking over a smaller lump sum now for larger monthly payments decades in the future. Let’s say our 65-year-old instead uses that $93,000 to buy a deferred-income annuity that pays out monthly income starting 20 years later. A quote from ImmediateAnnuities.com shows that he’ll get $3,265 a month for the rest of his life starting at age 85.
Not only do you create future income for your later retirement years, but you cut down the time that your portfolio has to cover all your needs. If you have plenty in your portfolio 20 years down the road, you’ll be living on easy street. But if your portfolio is nearly exhausted when the deferred-income payments kick in, you’ll have the monthly income you need to pay your basic expenses.
If you are reticent to hand over a lump sum to an insurer, consider choosing an annuity that has payouts for beneficiaries. That option is available for both immediate annuities and deferred annuities. Just be aware that you will get lower monthly income payouts in exchange for the flexibility for heirs to receive some money when you pass.
Knowing that there are a variety of options for meeting your retirement-savings goal in the homestretch should be a confidence booster. The key is to “look at every resource possible,” says Cheng. With the right combination of moves, you can guarantee a financially secure retirement, even if you have to play catch up.