Retirees fall short of the retirement income replacement ratio

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To maintain your standard of living in retirement, the rule of thumb is that you need to be able to replace at least 70% of the income you were earning while you were working.

But many retirees fall short of this retirement income goal, according to research from Goldman Sachs Asset Management. The survey included 1,566 American respondents between July and August 2022.

The company’s research found that only 25% of retirees generate that much income. Meanwhile, more than half of retirees — 51% — handle less than 50% of their pre-retirement income.

The gap isn’t surprising, considering that more than 40% of those still working say they’re behind schedule with their retirement savings. Members of Generation X — caught between millennials and baby boomers — are most likely to say they’re late in retirement, with more than 50%.

Competing life goals and financial priorities – the so-called financial spiral – may get in the way as savers balance other roles as parents or caregivers and as homeowners or renters.

“You have all these competing priorities that could crowd out retirement savings,” said Mike Moran, senior pension analyst at Goldman Sachs.

If you’re still working, there are steps you can take to meaningfully increase your cash flow in later years and improve your chances of meeting the 70% income replacement ratio.

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1. Cut back on your lifestyle

By reducing your cost of living now, you will need less income in retirement. Ask yourself if you’re spending less than you are, suggests Sharon Carson, retirement strategist at JPMorgan Asset Management.

“If you haven’t already, this is the perfect place to start,” she said.

Ted Jenkin, CEO and founder of Oxygen Financial and a member of CNBC’s Board of Financial Advisers, said he recommends a 21-day budget cleanse to help people cut back on their spending.

Over the course of 21 days, shop every bill on your home to see if you can get a better deal.

2. Push your savings up

Tips for drawing up your retirement plan

Even if your budget is tight, increase the amount you set aside for retirement by even 1% of your salary It can go a long way when you eventually need to withdraw that money.

In general, you should set aside 15% of your salary for retirement, according to retirement experts at JP Morgan Asset Management. This can include a corporate match, if you have one.

You may not get 15% right away.

“Look at what you can do each year,” Carson said. “If you can do something, you have a long-term advantage from this compound.”

3. Find ways to save outside of business plans

If you don’t have access to a 401(k) or other retirement savings plan through your employer, you’re not alone. As many as 57 million Americans lack a workplace retirement savings plan, according to estimates.

You can still contribute to an individual retirement account with pre-tax money, or after-tax money through a Roth IRA. Some restrictions apply. For example, there are some limits on pretax contributions if the spouse has a workplace plan, and after-tax Roth contributions are based on your income.

Many states are also stepping up to provide retirement savings programs for workers who lack employer plans.

4. Stay invested

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Moran said the number one favorite source of retirement income for retirees surveyed by Goldman Sachs was investments. To get more income from your portfolio, you might want to consider dividends or municipal bonds, he said.

The key, Carson said, is to stay invested, not put your money in and out of the market.

Admittedly, losses hurt. But trying to time the market can be a losing battle, particularly because the market’s worst days tend to be closely followed by its best days.

“If you try to time the market, you have to be right twice,” Carson said.

5. Delaying claiming Social Security benefits

The longer you wait to claim Social Security retirement benefits until age 70, the larger your monthly checks.

You can claim starting at age 62, but your benefits will be reduced.

At your full retirement age — 66 to 67, depending on when you were born — you’ll receive the full benefits you earned.

For every year you fall behind that age, up to age 70, you can get up to an 8% raise.

Experts say it’s still smart to wait, even with a historic high cost of living adjustment of 8.7% this year.

A COLA increases what’s known as your basic insurance amount, and the benefits owed to you at your full retirement age. The longer you delay claiming, the greater your benefits and the greater the impact your annual cost of living adjustments may have.

6. Consider an annual salary

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With pensions moving beyond, products called annuities have become a way to create a stream of income in retirement. You’ll have to sacrifice a lump sum of money up front in exchange for a steady stream of monthly checks when you retire.

Moran said a deferred annuity, which can provide income at a future date, can help if you’re worried about running out of money later.

Jenkin noted that some immediate or variable annuities, which may provide sooner checks, offer attractive guarantees.

Since these contracts are binding, it pays to proceed with caution.

Make sure fees and charges aren’t out of line, Jenkin said, and don’t buy a product that someone at a dinner party is paying for.

“The best advice is to hire someone with an hourly rate to go buy products for you,” he said. “Don’t pay anyone a fee or commission to sell it.”

7. Plan to work out a little longer

Goldman Sachs research has found that the second most preferred source of retirement income is part-time employment.

There are many benefits to that. Your income may not disappear completely in retirement. Plus, you may still get the social benefit from interacting with colleagues, according to Moran.

The extra income you earn may help you delay Social Security benefits or withdraw less from your retirement portfolio, which can help make sure your money lasts longer in the years to come.

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