A low-savings retirement is one in which you do not have enough money in your portfolio to generate a comfortable retirement income. For example, let’s say you’re 65 and have $120,000 in your retirement portfolio. We’ll assume that this money is in your 401(k) before tax. This will not generate a livable income on its own. But that doesn’t mean it’s too late to make plans, or that you can’t live a safe and comfortable life. But it will take some thought, sacrifice and planning.
Here are some things to consider in your planning. You can too Get matched with a fiduciary financial advisor Who can help you build and implement a suitable, customized retirement plan.
As you approach retirement, regardless of your situation, the first thing you should do is evaluate your income and assets. What will generate income for you? What level of profits can you rely on? What assets can you convert into cash? What benefits, pensions or other payments will you get? Are you eligible for Social Security benefits?
For example, let’s say you own your own home. In this case, a sale or reverse mortgage can often generate a large cash payment to supplement your savings.
In this case, we assume you only have two potential sources of retirement income: Social Security and a 401(k) of $120,000. So, we start planning from there. What income can you expect from each asset?
For your portfolio, this will depend on how you manage your money. This is a profile where an annuity can be a very strong option, as this can sometimes increase the value of relatively small portfolios. For example, let’s say you start retiring at age 70 actor An annuity could generate $1,081 per month ($12,972 per year). Although subject to inflation, this income is much higher than approximately $400 to $600 per month expected From the strategy of withdrawing 4% of the same amount.
For Social Security, unfortunately, this is a profile in which you will not be eligible for maximum benefits. Social Security is designed to maximize benefits for higher-income families: the more you earn while working, the more benefits you collect, to some extent.
However, assuming you’ve paid into the program, your next step is to start planning for your actual Social Security income. You can visit SSA and get a report On your actual interests and credits, or you can use them SmartAsset Calculator For possible estimation. Once you know what you’ll get, you can start planning for that income. Your actual benefits will depend entirely on the amount you have earned over your working life, and the number of years. However, for example, middle The retiree received $1,907 per month ($22,884 per year) in benefits.
If you receive an average benefit check and purchase a representative annuity, you may be able to plan for about $35,856 per year in partially inflation-adjusted income. A Financial advisor It can help you make income projections based on your portfolio and risk tolerance.
Your next step is to figure out how you can maximize your income streams. In any case, your best first step is to postpone retirement until age 70 if you can. This will boost your benefits and savings.
First, waiting until age 70 will shorten your retirement period. This will give you extra years of living on your income, rather than your investment portfolio, and will give you a few extra years to potentially save.
Second, even setting aside additional portfolio contributions can increase the value of your savings. For example, the annuity figure above assumes that you invest now and accrue payments in five years. If you collect payments within two years, at age 67, you might expect that closer To $843 per month. Or, if you keep your money invested in a mixed asset portfolio with 8% growth, it may be possible by age 70. It grows To $176,000.
More importantly, waiting until age 70 will increase your Social Security benefits to 124% of their base level. If you’ll excuse the informality, this could be a game-changer. For example, take the average benefit payment of $1,907 mentioned above. If you wait until age 70, that amount could rise to $2,364 per month ($1,907 * $1.24), or $28,376. Combined with a representative annuity at age 70, this could generate an income of $41,348 per year.
Your next step is careful spending and tax management.
First, you will depend on it to a large extent Medical care For your health care spending. This will be necessary, so be sure to understand your health needs and how they relate to this program’s coverage. In particular, be sure to purchase any necessary gap coverage in advance.
Depending on your state, you may be able to rely on Medicaid to cover this gap. You will almost certainly also need to rely on this program for any necessary long-term care in your later years, so be sure to understand the asset and income requirements of your state’s program.
From there, it’s time to plan your taxes. If this is a standard 401(k) or other pre-tax portfolio, you will have to report the withdrawals as taxable income. But if your adjusted gross income is low, your federal income taxes will likely be relatively low, too. However, between Social Security and wallet income, you’ll likely get enough to pay around $1,200 to $1,500 per year in taxes.
A financial advisor can help you develop a tax strategy for retirement. Talk to a financial advisor today.
Finally, it’s time to make your spending match your income. How it fits will depend greatly on your current lifestyle and location.
Take our example above, where you wait until age 70 and generate $41,348 per year in combined income. The rule of thumb is that retirement income can generally pay for about 80% of your pre-retirement lifestyle, so this income should generally pay for a working lifestyle of about $51,685. ($41,348 / $0.8) In some parts of the country, this is not only stable, but very comfortable.
So, look at your budget. Will this work for you? Can you wait until age 70, and can you live your current lifestyle on about $40,000 a year?
If not, start looking at what you can cut. Often times, housing is the largest fixed expense for any household, especially if you live in an expensive urban area. Transportation will likely help with this. By moving to an affordable community, you can significantly adjust your housing costs. You’ll also likely cut all your other living costs, from bills to food. Finally, by relocating, you can shop in a state with Medicaid laws that will help support your health care.
Get matched with a financial advisor Who can help you evaluate your options for retirement.
If you have low retirement savings, don’t panic. You have the time and opportunities to make sure you’re comfortable in your later years, but it will take some careful planning. However, however you choose to do it, maximizing the value of your portfolio will be essential. Managing spending, and perhaps moving to an inexpensive community, may be the answer.
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We can do better than living on a limited retirement budget, we can actually help you save money. With these tips, you can actually set aside some extra cash so that your later retirement will be more generous than your early years. Here’s how.
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A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor is not difficult. Free SmartAsset tool Matches you with up to three vetted financial advisors serving your area, and you can make a free introductory call with your matched advisors to determine which advisor you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Start now.
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Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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