There's a Gaping Hole in Your Future Budget

You may not have noticed it yet, but you can't afford to retire. 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.

Apr 27, 2014 at 12:00PM

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.

Fidelity Income Gap Chart

Source: Fidelity Investments.

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.

How to Get Even More Income During Retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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