In the course of planning and saving for retirement, it makes sense to figure out how much income you think you'll need to maintain the lifestyle you want. That way, you can adopt a strategy that makes it possible to meet your income goals.
But even if you do your best to plan well and save aggressively for retirement, you could, unfortunately, wind up with an income shortfall on your hands. Here are some of the reasons why.
Image source: Getty Images.
1. Your investments underperform
It's a good idea to make sure you're not overly invested in stocks as retirement nears, and also, during retirement. This isn't to say that you should dump your stocks completely. Rather, they shouldn't comprise 85% of your portfolio at a time when you might consistently be dipping into your savings to cover living costs.
But even if you follow this advice and go leaner on stocks in retirement, you might still find that your portfolio underperforms on a whole. The bond market might experience its share of volatility, even though bonds are generally considered to be a more stable asset than stocks. And also, we just talked about not unloading your stocks completely in retirement. But that portion of your portfolio could underperform, too.
2. Social Security slashes benefits
The amount of money Social Security pays you in retirement will hinge on different factors. These include your 35 highest-paid years of wages during your career and the age at which you sign up to start receiving your monthly benefits.
But even if you file for Social Security strategically, you might end up with less money from the program by virtue of benefit cuts. Social Security is facing a revenue shortfall in the coming years, and it can tap its trust funds to make up the difference until they're depleted. But in a little over a decade from now, those trust funds could be out of money, at which point benefit cuts are a distinct possibility.
3. Taxes catch you by surprise
Some of the income sources you're privy to in retirement may end up being taxable -- even if you would've expected otherwise. Social Security is a prime example. If your income exceeds a certain threshold, a large portion of your benefits could be taxed. Plus, unless you have your savings in a Roth IRA or 401(k) plan, the withdrawals you take from your nest egg will be taxable as well.
Don't get caught off-guard
Clearly, there are several different reasons why you could end up with less retirement income than expected. Your best bet? Be flexible and have a backup plan.
You may want to retire in a big city and enjoy its nightlife. But if your portfolio does poorly or your Social Security benefits are cut, then you may have to settle for a smaller city. Similarly, you may have to go out and get a part-time to compensate for things like unexpected taxes.
Unfortunately, many seniors end up in a position where they don't have as much money coming their way as expected. But if you're willing to roll with the punches and make key changes as needed, a lower level of retirement income won't have to utterly wreck your senior years.
