Income from retirement savings is crucial as a supplement to your Social Security benefit if you don't want to face serious financial worries in your later years. Unfortunately, recent data from the Insured Retirement Institute revealed many older workers have investment account balances that are far too low.
In fact, according to IRI's data, 51% of older workers have less than $50,000 saved for their retirement. This could be a huge problem for a few key reasons.
Older workers are unprepared for a secure retirement
The IRI data showing that more than half of older workers have a nest egg of less than $50,000 is really disturbing because it reveals just how unprepared so many Americans are to support themselves once their paychecks stop. See, even a nest egg of $50,000 would be woefully inadequate for a typical senior to provide for their needs.
Retirees must make sure they aren't withdrawing too much at one time from retirement accounts to avoid running out of money while they are still alive. Experts generally view it as safe to withdraw a maximum of 4% of a retirement account balance during the first year of retirement and in many cases, an even smaller withdrawal rate is recommended. A senior with a $50,000 nest egg who takes out 4% of their account balance would end up with just $2,000 in income.
Sadly, for most people, that's not going to be nearly enough. That's because the average Social Security benefit is just $1,657 in 2022. A senior who gets only $2,000 in investment income to supplement it would have to live on only $21,884 per year. When factoring in housing, medical care, transportation, and other essential expenses, this annual income is likely to provide for a bare-bones standard of living if it can cover the necessities at all.
Retirees are typically going to need to replace at least 80% of pre-retirement income to be comfortable. Social Security benefits are intended to replace about 40% of pre-retirement funds. This means that savings should cover the rest (for those without a pension).
If the typical senior needs their retirement investments to give them close to the same amount as their Social Security benefit, they'd be short more than $17,000 a year if their nest egg produced just $2,000.
What can you do if you have too little saved for retirement?
If you're one of the many older workers who doesn't have enough saved for your later years, the good news is there are some options available to you. These include:
- Working longer. Staying on the job for extra time provides the chance to bulk up your savings, increase your Social Security benefit by delaying your claim, and rely on your savings for less time.
- Take advantage of catch-up contributions. Older workers are allowed to contribute more to tax-advantaged retirement accounts. Take this opportunity as long as you're on the job to supersize your retirement accounts.
- Downsize. If you can sell your home and move to a smaller one, get rid of a costly vehicle, and make other big lifestyle changes, you may be able to save more now and get by on less in retirement.
While these steps may not sound like fun, it's a lot better to act quickly to build as much retirement security as you can rather than to find yourself with an income you can't live on after leaving the workforce, when your options for fixing your finances are far slimmer.