How to bridge a retirement shortfall

If you want to thoroughly depress yourself, spend some time looking at statistics about America’s retirement preparation.

InVanguard’s latest How America Saves reportthe average participant balance in Vanguard plans was $134,000 in 2023, but the median balance was only $35,000. For Vanguard plan employees who were between 55 and 64 years old, the mean and median balances in 2023 were $245,000 and $88,000, respectively. About half of people between the ages of 55 and 66 have no retirement savings at all, according toData from the US Census Bureauand women are worse off than men from the perspective of preparing for retirement.

It is clear that many people are heading for or experiencing a shortage. And for people who are dramatically under-saved and rely largely on Social Security for living expenses in retirement, there is no escaping the fact that their standard of living in retirement will be lower than when they were working.

What if, instead of looking for a single blockbuster solution to help close the savings gap, you considered some common-sense strategies: be willing to lower your standard of living in retirement a little, work a little longer, and work a little better, for example? investing?

If you make more modest changes to your plan’s margins, they’re likely to be more palatable from a lifestyle perspective, too; the thought of working until age 70 may not be appealing, but sticking with it until age 67 may be more feasible.

As pre-retirees have no doubt heard: continue to work even a few years past the traditional retirement age could deliver a threefer financially, allowing for additional savings and tax deferral, fewer years of portfolio deleveraging, and perhaps delayed filing with Social Security. The willingness to work part-time after retirement is another variation on this idea. But as attractive as working longer may seem given the numbers, making it the only contingency plan is a bad idea, as many who plan to work longer are unable to do so.

This is another exceptionally powerful lever, allowing individuals to receive an increase in benefits for each year they delay filing for Social Security beyond their limit full retirement age until the age of 70. However, to achieve this, someone may have to work longer or draw on a portfolio earlier.

The good news is that from a household budget perspective, many people are best equipped to boost their savings rates later in their careers. They are often in their peak years, and other major early retirement expenses, such as home purchases and student loans, may be in the rearview mirror.

The bad news is that with a shorter time horizon, the newly invested dollars will have less time to invest connection before they have to withdraw them. That doesn’t mean late retirees don’t have to worry about additional contributions: Even an additional $5,000 per year investment, which yields a modest 4% average return over 10 years, would translate into an additional $60,000 in retirement.

This one is a gift. Lower costs for investment funds are correlated with better returns, so why not work to bring down the overall cost of your portfolio? Reducing costs can be particularly beneficial if you increase your portfolio’s share of safer investments such as bonds, where absolute investment returns, while better today than a few years ago, will typically be relatively low. Furthermore, the difference between very strong and very poor performing investments can come down to costs.

Retirees who aim for the same dollar amount in retirement year after year, adjusted for inflation, will generally want to be more conservative with their starting portfolio withdrawal amount. Meanwhile, those willing to adopt a dynamic withdrawal approach, where withdrawals vary based on how their portfolios have performed, can generally enjoy a higher withdrawal rate, as illustrated inour team’s annual pension expenditure survey.

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This article was provided to The Associated Press by Morningstar. For more personal finance content, visithttps://www.morningstar.com/personal-finance

Christine Benz is director of personal finance and retirement planning at Morningstar.