It's no secret that Americans on a whole are facing a retirement crisis. It's estimated that nearly half of all households have no money set aside for the future, and while younger workers have a decent opportunity to catch up, older workers have fewer options.
Unfortunately, most baby boomers nearing retirement are at risk of falling short once they stop working. Only one-third of boomers with retirement savings have accumulated $250,000 or more, according to data from the Insured Retirement Institute. And based on their current savings levels, most boomers will face a potential retirement income gap of $3,864 to $12,072 each year.
If your savings aren't where they need to be and you don't have a ton of working years left, now's the time to start making changes and taking steps to compensate. Otherwise, you'll risk struggling financially in retirement, and winding up miserable as a result.
Take advantage of catch-up contributions
One advantage older workers have over younger ones is the ability to fund retirement accounts at higher levels. Currently, anyone 50 and over can contribute up to $6,500 a year to an IRA, and $24,500 a year to a 401(k). Max out the latter for eight years, and you'll add another $242,000 to your existing nest egg, assuming your investments are able to generate a relatively conservative 6% average annual return during that time.
Of course, not everyone can manage to max out a 401(k), and many workers don't have access to an employer-sponsored plan in the first place. But you can still boost your nest egg substantially by maxing out an IRA later on in your career. Do so for eight years at a 6% average annual return, and you'll wind up $64,000 richer.
Maybe your goal is to retire at your Social Security full retirement age, which, for today's workers, is 66, 67, or somewhere in between. But if you're behind on savings and therefore at risk of an income shortfall, you're better off postponing retirement and extending your career a bit. Doing so offers a number of opportunities. First, you'll have a chance to save more money in your IRA or 401(k), which, as we just saw, can go a long way. Furthermore, by working longer, you'll avoid dipping into your existing savings sooner, thus stretching that money.
But perhaps most importantly, working longer might enable you to delay your Social Security benefits past your full retirement age, which could set you up with a larger income stream for life. For each year you hold off on Social Security past full retirement age, your benefit payments automatically go up by 8%. This incentive is applicable up until you turn 70, at which point there's no sense in waiting on benefits any longer. But let's imagine you're entitled to $1,500 a month from Social Security at age 66, only you decide to work another four years and file when you turn 70. At that point, you'll boost your monthly income from $1,500 to $1,980.
So remember the $3,864 to $12,072 annual income shortfall we discussed above? Collecting an additional $5,760 per year in benefits might negate it, which is why working longer and holding off on Social Security could really pay off.
Plan to work part-time in retirement
If you're facing a future income shortfall because of your limited savings, here's another solution you might employ: working part-time during retirement. Not only will this guarantee you more money, but it'll help you avoid spending money to occupy your newfound free time.
Not thrilled with the notion of working later in life? Keep in mind that your part-time gig doesn't have to involve bagging groceries, working at a call center, or even consulting in your former field. If there's a hobby you've always been passionate about, retirement is a great time to turn it into a money-making opportunity.
Think about it: Rather than just play around in your garden, you can sell your plants, vegetables, and herbs. Instead of quilting for fun, you can sell your wares online or at local craft fairs and turn them into a source of cash. There's a world of possibility out there, so don't assume that working during retirement will make you unhappy. If anything, it may just give you a sense of purpose at a time when you're lacking structure.
One final thing: If you're among the one-third of baby boomers who have amassed $250,000 or more, don't assume that your future income needs will be met. At a 4% annual withdrawal rate, which has long been the standard, a $300,000 nest egg leaves you with just $12,000 a year in income from savings, and that's not a whole lot, even with Social Security thrown into the mix. In other words, you should always keep striving to save more for the future, even if your nest egg is relatively healthy. The higher your ending balance, the more flexibility you'll buy yourself later in life.
The Motley Fool has a disclosure policy.