Retirement used to be something to look forward to. Nowadays people are understandably nervous about it, thanks to a growing list of issues, including the waning number of traditional pension plans, low participation rates in 401(k)s and other defined-contribution programs, a sliver-thin national savings rate, an imminent Social Security shortage, a brutal recession, and a pokey economic recovery.
Our fears are certainly warranted. For the average American, there's a huge difference between the amount of income you'll have after you quit work and what it will cost to maintain your current standard of living.
When a 2012 Fidelity research report put dollar signs on these retirement realities, it found that the average American faces a 28% income shortfall after retirement. In dollars-and-cents terms and across generations, we're taking about a shortage of roughly $1,650 to $2,100 per household per month.
Can you live on that much less? If not, your options aren't that great. They include dying before your money runs out, putting your expenses on plastic (and hopefully dying before the tab comes due), and relying on family members to take you in during your dotage (and not resenting you until you die).
Four ways to fill the income gap
If none of these death-centric strategies sound particularly appealing, you have options -- ones you can implement today to help prevent an income deficiency when you do retire.
1. Invest more aggressively and selfishly
If you're 40 or younger, adding a higher percentage of stocks to your portfolio with a lower allocation to bonds will allow your portfolio to grow more quickly than if you were in a "safer" allocation focused on a higher bond exposure.
Also review your savings priorities. For Generation X-ers, saving for retirement comes before saving for your kids' college educations. If you're in Gen Y (or another generation), your goal should be to pay off your high-interest debt and, when that's gone, use the cash you were paying for investment contributions.
2. Fill out your contribution form, already, and stop spending your raises
Are you not participating in your employer-sponsored retirement plans, like a 401(k) or 403(b)? Big mistake, especially if your employer matches your contributions. Employer matches essentially put free money into your account. Plus, once you fill out the contribution paperwork (that's roughly 10 minutes out of your day), the money will come out of your paycheck -- pre-tax! -- before you can touch it. There's no better way to save than to make it automatic.
Once you're in, for both baby boomers and younger workers, ratcheting up your contributions to an ideal 10% of your salary will have a huge, positive effect on your portfolio when you retire. And with every raise that you get, aim to increase your contributions.
3. Delay your retirement party
"Work longer" is probably not a savings strategy that you relish. But it could have nearly as large an effect on your retirement income as boosting the amount you save. And it can mean the difference between a miserable retirement spent trying to make ends meet and a more relaxed one.
Working longer gives you more years to contribute to your 401(k) and therefore more years to let the contributions you've made during your lifetime continue to grow. An added bonus is that you may be able to delay relying on Social Security -- a move that could result in a much higher payout.
4. Have the mother of all garage sales -- and literally sell the garage
When you retire, chances are you won't need as large a house as you're used to. In fact, if the kids have already moved out, do you need all that house even now?
So, while it's still your choice, now's the time to pare down and look for a place that costs less. (And, if your grown kids are still living in the house, at least charge them for rent, utilities, and food.) By trading down to a smaller house (or even moving to a less expensive area), you'll have additional money you can put toward living expenses in retirement.
Time's on your side -- for now
It's scary, but even before you do any calculations to figure out what your retirement shortfall might be, take a first step. Increase your retirement contributions, tackle your debt to pay it off faster, or start researching lower-cost housing.
Regardless of your age and how many more years you plan to work, the sooner you start to prepare for the realities of your retirement, the easier it'll be to make adjustments to reach your goals.