You’ve worked hard since you were young. You’ve contributed to your 401(k), tried to make responsible choices with your finances and you can see retirement right around the corner. But will your retirement savings really be enough? Even with a carefully planned retirement budget, the rising cost of health care and any unexpected expenses could take a bigger chunk of your savings than you realize. Because of this, you may be facing a retirement gap.
What is a retirement gap?
The definition of a retirement gap is when the money you’re on track to have when you retire is less than what you’ll actually need to retire the way you want.
To figure out if you have a retirement gap and how much it could be, use a retirement income calculator. Note that it can be tough for an online tool to accurately predict your future since it’s not familiar with your lifestyle plans. Instead, you may want to add up all your potential retirement income sources including your 401(k), Social Security, Individual Retirement Account (IRA), pension, and other savings and investments, and those of your spouse, if applicable.
Next, make a reasonable estimate of the amount you’ll need, either as a monthly or lump sum, for your retirement. Subtract the amount you need from the amount you’re projected to have. The amount you’re missing is your retirement income gap. Alternatively, meeting with a financial advisor may give you a more accurate picture of what’s ahead.
All may not be lost if you have a retirement savings gap. There are steps you can take now to bridge the gap, increase your savings and ensure you can sustain yourself throughout retirement.
How to close the retirement income gap
One way to close the retirement income gap is to ramp up your savings now. Start by taking a look at your budget, then reduce your spending on extras like restaurant meals and vacations. Next, transfer high-interest credit card balances to a card with a more competitive rate like LGFCU’s Visa® Credit Card to pay down balances faster. Then consider maxing out catch-up contributions to your 401(k), supplemental retirement plan or IRA.
If you’ll be short on income at the time of your predicted retirement, you may want to wait to retire. This retirement strategy often employed when you’re counting on Social Security benefits. Waiting means your Social Security benefits increase by a certain percentage if you delay retirement at least until full retirement age, up to age 70. The chart below shows you how much more your benefits increase for each year you delay retirement, based on the year of your birth.
Increased benefits for delayed retirement
| Year of birth | Yearly rate of increase | Monthly rate of increase |
|---|---|---|
| 1933-1934 | 5.5% | 11/24 of 1% |
| 1935-1936 | 6.0% | 1/2 of 1% |
| 1937-1938 | 6.5% | 13/24 of 1% |
| 1939-1940 | 7.0% | 7/12 of 1% |
| 1941-1942 | 7.5% | 5/8 of 1% |
| 1943 or later | 8.0% | 2/3 of 1% |
| Note: If you were born on January 1, you should refer to the rate of increase for the previous year.
Source: Social Security Administration Delayed Retirement Benefits |
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If you don’t want to wait to fully retire, adjust your retirement expectations by employing a semi-retirement strategy. You may have been dreaming of a retirement that involves a hammock on a tropical island. But a more realistic view may involve continuing to work part time. This can give you a little more time to pursue new hobbies or extended time with family while still earning the income you need to bridge the gap. You can combine your part-time work with living more simply than you did when you were in the workforce or living an entirely different lifestyle to potentially save even more money.
Reconsider your investment strategy. Rather than moving all your money to more conservative options as you age, talk to a financial professional to help you find a mix of investments that can grow your retirement funds in a shorter timeframe. Setting up a Share Term Certificate with staggering maturity dates may also provide rolling funds to help you bridge the retirement gap.
Try implementing several small steps to help you cover a retirement savings shortfall.
The advice provided is for informational purposes only. Contact a financial advisor for additional guidance.