The average American's retirement savings is about $1.37 million short of what they believe they'll need to retire comfortably, according to a recent Northwestern Mutual survey. You might expect this among the younger generations, but even baby boomers -- many of whom are already retired -- have just $120,300 saved on average while believing they'll need $990,000 to retire. That's a difference of $870,000. Some have no income to rely upon except their monthly Social Security benefits.
Though what Americans believe they'll need to retire may not match their actual needs, the survey results highlight the real challenge of saving for retirement. But with the right strategies, retirees might be able to afford a higher quality of life than they expect. Here are three ways to reduce your retirement costs or increase your monthly income that you may not have considered.
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1. Moving to a more affordable place
Moving in retirement can mean different things to different people. It might be:
- Downsizing to a smaller home in the same neighborhood
- Moving to a nearby town or state
- Moving to another country
All of these are valid ways to right-size your retirement expenses. Downsizing could significantly reduce your mortgage payment and property taxes, while moving to another state or country with a lower cost of living could help the money you have last longer.
This might not appeal to you if you're strongly attached to where you currently live. It's important to weigh the amenities your current home possesses in terms of nearby family and friends and access to activities you enjoy.
If you're open to moving, crunch the numbers to make sure it's financially worthwhile. It might not be the right choice if you're going from a paid-off home to a property where you'd have a mortgage again. But if you'll save on most of your essential costs, like housing, groceries, and healthcare, it could be the right decision.
2. Working part-time
Working in retirement, even part-time, offers two key financial benefits. First, it gives you a steady paycheck you can use to cover some of your retirement expenses. As a result, you won't have to drain your personal savings as quickly.
And second, withdrawing less from your retirement accounts could also help your savings grow further. Let's say you have $120,300 in your IRA -- the amount the average baby boomer has saved based on the Northwestern Mutual survey. Assuming you need to withdraw $12,000 per year to supplement your Social Security benefits and you earn an 8% annual return on your savings, that nest egg would last you just over 20 years.
Now, imagine you take a part-time job that pays you $6,000 per year, and you keep this job for the first seven years of retirement. During that time, you'd only need to withdraw $6,000 per year from your IRA. With an 8% average annual return, the value of your savings would actually continue to grow, and you'd wind up with $150,300 at the end of year 7. From this point on, your savings would last just over 40 years with annual withdrawals of $12,000.
3. Delaying retirement
Delaying retirement has similar benefits to working part-time in retirement. It helps the savings you have last longer and allows your investments to continue growing, but it also reduces the cost of your retirement. If you expect to spend $30,000 in your first year of retirement, then working just one more year would save your nest egg that $30,000.
You might also be able to put extra money away for retirement by extending your time in the workforce. Stashing cash in tax-deferred accounts, like traditional IRAs or 401(k)s, reduces your taxable income today. These savings could make it easier for you to defer money for your future, even if those dollars won't be invested for that long before you need to withdraw them.
It's possible to use a combination of the above strategies, as well. For example, you could put off retirement for a while and then drop to part-time work, rather than leaving the workforce entirely. This is known as a phased retirement. Combining strategies like this could help you save significantly more than any one strategy on its own.
