A low savings retirement is one where you don’t have enough money in your portfolio to generate a comfortable retirement income. For example, let’s say you are 65 and have $120,000 in your retirement portfolio. We assume this money is in a pre-tax 401(k). This in itself does not provide a living income. However, that doesn’t mean it’s too late to make plans, or that you can’t live a safe and comfortable life. But it will take some thought, sacrifice and planning.
Here are some things to consider in your planning. You can also be paired with a fiduciary financial advisor who can help you design and implement an appropriate, customized retirement plan.
As you approach retirement, regardless of your situation, the first thing you should do is take stock of your income and assets. What brings you income? What income level is reliable? Which assets can you convert into cash? What benefits, pensions or other benefits do you receive? Are you eligible for social security benefits?
For example, suppose you own your own home. In this case, a sale or reverse mortgage can often provide a significant cash boost to supplement your savings.
In this case, we’ll assume you have only two potential income streams on hand for retirement: Social Security and a $120,000 401(k). So from there we start planning. What income can you expect from each asset?
For your portfolio, this depends on how you manage your money. This is a profile where an annuity can be a very strong option because it can sometimes maximize the value of relatively small portfolios. For example, suppose you retire at the age of 70. A representative annuity can earn $1,081 per month ($12,972 per year). While this income is exposed to inflation, it is significantly higher than the approximately $400 to $600 per month you would expect from a 4% withdrawal strategy on the same amount.
Unfortunately, for social security purposes, this is a profile in which you are unlikely to qualify for maximum benefits. Social Security is built to maximize benefits for higher-income households: the more you earn while you work, the more you collect in benefits, to some extent.
Still, assuming you’ve paid into the program, your next step is to plan your actual Social Security income. You can visit the SSA and get a report on your actual benefits and credits, or you can use SmartAsset’s calculator for a likely estimate. Once you know what you’ll receive, you can start planning for that income. Your actual benefits depend entirely on how much you have earned over your working life, and for how many years. However, as an example, the average retiree received $1,907 per month ($22,884 per year) in benefits.
If you receive an average benefit check and purchase a representative annuity, you may be able to plan for about $35,856 per year for partially inflation-adjusted income. A financial advisor can help you make income projections based on your portfolio and risk tolerance.
The next step is figuring out how to maximize your income streams. In all cases, your best first step is to delay your retirement until age 70, if you can. This increases both your benefits and your savings.
First, waiting until age 70 will shorten your retirement. It gives you more years to live on your income, rather than your portfolio, and it gives you a few more years to potentially save.
Second, even if you set aside additional portfolio contributions, this can increase the value of your savings. For example, the representative annuity figure quoted above assumed you invest now and receive payments in five years. If you collect payments within two years, at age 67, you could expect to make closer to $843 per month. Or, if you keep your money invested in a mixed-asset portfolio with 8% growth, it could grow to $176,000 by age 70.
Most importantly, waiting until 70 will increase your Social Security benefits to 124% of their base level. If you forgive the informality, this could be a game-changer. Take, for example, the average benefit of $1,907 mentioned above. If you wait until age 70, this could increase to €2,364 per month (€1,907 * 1.24) or €28,376. Combined with a representative annuity at age 70, this can generate $41,348 per year in income.
Your next step is careful spending and tax management.
First, you will be largely dependent on Medicare for your health care expenses. This is essential, so make sure you understand your health needs and how they relate to this program’s coverage. In particular, make sure you purchase the necessary hole coverage in advance.
Depending on your state, you may be able to rely on Medicaid for this gap coverage. You will almost certainly also need to rely on this program for necessary long-term care in your later years, so make sure you understand your state program’s asset and income requirements.
From there, it’s time to plan taxes. If this is a standard 401(k) or other pre-tax portfolio, you must report withdrawals as taxable income. But if your adjusted gross income is low, your federal income taxes are likely relatively low, too. Still, between Social Security and portfolio income, you’ll probably earn enough to pay about $1,200 to $1,500 a year in taxes.
A financial advisor can help you devise a tax strategy for your retirement. Talk to a financial advisor today.
Finally, it’s time to make sure your expenses match your income. How this fits will largely depend on your current lifestyle and location.
Take our example above, where you wait until age 70 and generate $41,348 per year in combined income. The rule of thumb is that retirement income can generally pay for about 80% of a pre-retirement lifestyle, so this income should generally pay for about $51,685 for a working lifestyle. ($41,348 / 0.8) In some parts of the country, this is not only stable, but also quite comfortable.
So look at your budget. Will this work for you? Can you wait until age 70 and afford to live your current lifestyle on about $40,000 a year?
If not, start looking at what you can cut. Often, housing is the largest fixed expense for any household, especially if you live in an expensive urban area. Moving may help with this. By moving to a more affordable community, you may be able to significantly reduce your housing costs. You’ll also likely reduce all your other living expenses, from bills to food. Finally, relocating allows you to locate a state with Medicaid laws that will help support your health care.
Get matched with a financial advisor who can help you assess your retirement options.
If you have low savings, don’t panic. You have time and opportunities to ensure that you are comfortable in your later years, but it will require careful planning. However you do it, maximizing the value of your portfolio will be essential. Managing expenses and possibly moving to a low-cost community may be the key.
We can even do better than living on a tight retirement budget; we can actually help you save money. With these tips, you can actually put some extra money aside so that your later retirement is even more generous than your early years. Here’s how.
A financial advisor can help you draw up a comprehensive retirement plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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