The typical retired household spends about $45,000 per year, yet the average couple receives only $27,120 per year in Social Security. Closing the gap between retirement expenses and income means tapping savings, but with retirees living longer, more people increasingly are at risk of outliving their money. Will you be one of them?

The cold, hard facts

Retirement isn't cheap. And sadly, it's getting more expensive.

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In 2001, the average retiree spent $26,843 per year, including $3,765 on food and $3,430 on healthcare. Fast-forward to today, and the average retiree is spending $45,226 per year, including $5,660 on food and $5,871 on healthcare. Therefore, the average retiree's total spending climbed by a compounded 3.54% per year between 2001 and 2017, and that's significantly faster than inflation, which has increased by a little over 2% per year.

Retirement spending isn't likely to slow anytime soon, either. Longer-living retirees are more likely to require more healthcare, including costly long-term care.

Healthcare costs are increasing faster than ever, and while next-generation treatments for diseases, including cancer, work better, their price tags are eye-popping. As a result, Fidelity Investments estimates that the average retired couple will spend $275,000 on healthcare during retirement. Couple those costs with long-term care, which, according to Genworth Financial, runs about $3,628 per month for assisted living, and you begin to understand why savings are likely to come up short for so many people.

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Falling short on savings

Fidelity, one of the biggest administrators of retirement plans, claims that the average person has roughly $100,000 stashed away in their IRA or 401(k) accounts. While that's not chump change, it's still unlikely to be enough money to guarantee a financially secure retirement. 

In retirement, investors are encouraged to balance investments between riskier stocks and somewhat safer bonds. Based upon historical returns for balanced portfolios, it's recommended that retirees withdraw no more than 4% from their savings annually to reduce the risk of outliving their money. 

Given that retired couples are spending $45,226 per year, but only collecting $27,120 per year in Social Security, bridging the gap between expenses and Social Security would require savings of about $453,000 at a 4% withdrawal rate. 

Avoid the cash crunch

The odds may be stacked against retirees, but there are steps workers can take that can put them on a path to a worry-free retirement.

First, contributing consistently more money to a workplace retirement plan is critical. If you're currently contributing to a retirement plan, but you haven't increased your contribution rate in a while, it may be time to consider it. According to Transamerica, the typical Generation X worker contributes 7% of their income to a 401(k) plan, but arguably, a rate between 10% to 15% is necessary to produce a retirement savings nest egg that's large enough to cover retirement expenses.

If you find that getting to a double-digit contribution rate is daunting, see if your employer offers auto-escalation. This feature allows you to automatically boost your contribution by a fixed percentage every year, up to a specified cap. Even if you increase your contribution rate by just 1% per year, you can add six figures to your retirement savings.

For example, a 45-year old who earns $45,000 per year and who currently contributes 7% of their income to a 401(k) would end up with $150,000 more in savings if they increased their contribution rate by 1% annually until age 65, earn an average 6% return, and get an average 2% pay increase every year.

If you're age 50 and up, consider taking advantage of catch-up contributions, too. In 2017, workers can contribute an additional 1,000 per year to an IRA and an additional $6,000 per year to a 401(k) or 403(b) plan. That means that $6,500 can be contributed to an IRA and $24,000 can be contributed to an employer-sponsored plan this year thanks to catch-up contributions.

Planning ahead to eliminate expenses in retirement is also a smart move. Adding an extra $100 per month to a $200,000 mortgage that has 20 years remaining can save you thousands of dollars in interest, and lop years off your mortgage term, allowing you to retire debt free. Overpaying on auto loans, student loans, and credit cards will also right-size your retirement expenses.

Overall, creating a plan now that allows you to save more and spend less in the future is a must if you want to enjoy a financially secure retirement.

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