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I feel hopeless. I am 60 years old and have only $15,000 saved. I receive an 80% pension from the state of Massachusetts and be able to retire in three years. What can I do now to increase my savings?
– Joy
There’s no question that $15,000 is a small amount of retirement savings for a 60-year-old, and I can understand why you’re concerned about catching up. However, I would encourage you to reframe the problem you are facing. Instead of focusing on the fact that you have a low savings balance, think about your overall retirement readiness because that’s what it’s all about. You may be in a better position than you think, or there may be better ways to close the gap than saving more.
Would you like help assessing your retirement readiness and income? Talk to a financial advisor today.
Start by making sure you have a good understanding of the amount of income you’ll need in retirement, and compare that to what you currently earn. You will probably find that you need at most the same income as you currently have, but possibly even less.
One thing I notice about your situation is that Massachusetts has a 5% income tax. However, AOW benefits are excluded, so you immediately save 5% of your income that you would normally pay.
A pension that replaces 80% of your current income is substantial and definitely compensates for a significant part of the ‘missing’ pension savings. Suppose you need 90% of your current income. If your pension replaces 80%, you are largely there. (If you need more help with your retirement income plan, consider matching with a financial advisor today.)
Saving more is certainly a good idea, but I’m not sure how much you can realistically catch up on at this point. I don’t know what your income is and what your expenses are. But I know the average person can only cut their budget so much. Without knowing your situation, I suspect there are better ways to close your retirement gap. (But if you want more help closing your retirement savings gap, this tool can help you find a financial advisor.)
So, what are they? Some of the ideas that come to mind include:
Look for realistic ways to permanently reduce your expenses that you can live with. If possible, downsizing your home or moving to an area with a lower cost of living can potentially put a significant amount of money back into your budget. This not only frees up room to save more, but also directly reduces the amount of income you need after retirement.
You say you can retire in three years, but should that? Every year you work means one year more income and one year less of your savings. Additionally, if you leave at age 63, you won’t be eligible for Medicare for two years, which could significantly increase your healthcare costs.
I’m not too familiar with the Massachusetts state pension system, but a quick look shows that your pension is based on your highest consecutive three or five years of income. Will working longer increase your wage base? Then you can consider what impact working longer may have on your eventual retirement income.
Note that since your pension is from Massachusetts, I assumed you were not contributing to Social Security. If you are indeed eligible for Social Security, don’t forget to include that as well.
You may also consider retiring from your current employer, and if you can continue working even part-time, try looking for another job. That may seem like a bad idea, but it can be a smart financial move, even if you earn significantly less at your new job.
Here’s why: if you receive 80% of your income in the form of a pension, you will come out ahead if you find another job and earn more than 20% of what you currently earn.
For simplicity’s sake, let’s say you currently make $100,000 per year. You retire and receive 80% of your salary – or $80,000 – annually from your pension. If you take a part-time job and earn $30,000, your total income actually increases to $110,000. (A financial advisor can help you play out scenarios like this. Consider speaking with an advisor today.)
Without a doubt, it would be great if you set aside more money for retirement savings. You should also take reasonable steps to increase it, but there is no magic formula to make a leap forward. However, an 80% pension gives you a solid income base with which you can plan.
Know that it may be better to focus on other areas of your retirement plan. Limiting expenses, maximizing your retirement, and seeking even a small amount of supplemental income can yield better results than focusing on savings.
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Social Security plays an important role in most Americans’ retirement income plans. Determining the optimal time to claim your benefits is critical. SmartAsset’s Social Security Calculator can help you estimate how much your benefits will be, based on when you plan to claim them.
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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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Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article. Some reader-submitted questions have been edited for clarity or brevity.
Photo credit: ©iStock.com/Pekic, ©iStock.com/kate_sept2004
The post Ask an Advisor: I’m 60 and ‘Feeling Hopeless’ with Only $15,000 Saved. What can I do now to increase my pension savings? first appeared on SmartReads by SmartAsset.
