By Suzanne Woolley and Charlie Wells
Aug. 24, 2022
It can be daunting to get back on track once you’ve fallen behind.
That will be a necessary task for millions of American workers who simply do not have enough saved for retirement. Research from Boston College shows a $7.1 trillion retirement-savings shortfall among US households, with half of them facing a lower standard of living once they stop working.
What — if anything — can you do to catch up? To find out, Bloomberg News interviewed retirement experts and planners across the country. This is what they told us, ordered for those closest to retirement (and in most need of a lifeline) to those furthest from it.
Ideal savings: Fidelity Investments suggests retirees should try to have at least 10 times their salary saved to retire at 67. That rough guideline assumes the person saved 15% of their income annually beginning at age 25, including employer matching contributions to a plan like a 401(k), has inflation-adjusted wage growth of 1.5% a year, and invests more than 50% of their savings in stocks over their lifetime.
If you’re retired already or planning to retire soon, grappling with a savings shortfall can feel beyond stressful. But advisers say doing the math and making some hard choices can help.
Savers who are the most at risk from a volatile market are those within five years of retiring up to those about five years into retirement. Needing to regularly sell stocks into a down market early in retirement can shrink a nest egg so much that the damage is impossible to repair, even if markets rebound later.
To limit the hit, retirees can lower the amount they withdraw from retirement accounts by pulling money from short-term bond holdings rather than from equities, or by doing part-time work to lessen the need to draw on savings.
For bigger spending needs, a home equity loan may be a good idea, said wealth adviser Melissa Weisz of RegentAtlantic. Normally, you wouldn’t want to take out a variable-rate loan when interest rates are rising — that’s usually the time to pay off any variable-rate debt, and credit card debt, before rates go even higher. But it may make more sense than selling stocks into a down market, and the loan can be paid off once markets recover, Weisz said.
Something all retirees can do is plan ahead in order to make the most of Social Security. Whatever your age, it’s a good idea to create an account on myssa.gov. For one thing, you can make sure that you are being accurately credited for your annual earnings. It’s also enlightening to play around with the calculator on the site to see what your monthly benefit check would be if you claimed early at age 62, at full retirement age (66 or 67, depending on when you were born), or if you wait to claim until age 70.
For those who can swing it, spending down taxable savings in order to claim Social Security benefits as close to age 70 as possible is a good move, said Alicia Munnell, director of Boston College’s Center for Retirement Research. For every year someone can wait from their full retirement age to age 70, their benefits increase by 8%. Also, if one spouse will have a much higher monthly benefit, it could be smart to wait until they turn 70 to claim it so that the surviving spouse can get that higher payout for life.
Ideal savings: Fidelity, which describes its guidelines as “aspirational,” estimates that a 50-year-old saver planning to retire at 67 should have about six times their salary saved at this point if they want to maintain their lifestyle in retirement.
Most workers tend to hit their peak earning years at or just after midlife. This is also when many people look at their retirement portfolios and realize they haven’t saved enough. Advisers say people in this situation can help themselves by aggressively saving more, staying on top of their portfolios, and recalibrating their expectations for when and how they might retire.
It starts with budgeting. To know how much financial leeway you’ll have in retirement, a thorough look at how much cash is coming in and going out is the first step. It sounds basic, but while some people are budgeting wizards, many more have only a fuzzy idea of how much they spend each month, especially as inflation wreaks havoc on prices.
After you’ve gone over credit card statements and online bank accounts and made a budget (advisers recommend budgeting apps such as Mint, Simplifi by Quicken and YNAB), consider doing a “cost audit” of your saving and investment accounts.
“Managing fees is crucial, and conducting a cost audit is a good way to feel a sense of control in an environment that feels out of control,” said Christine Benz, director of personal finance at Morningstar.
Once you know what your monthly budget is, you can see whether you have enough saved to cover at least three to six months of emergency expenses, as many financial planners recommend.
Finally, advisers say it’s a good idea to look across all of your different investment accounts to make sure you’re clear on your stock exposure. Some retirement savers might be surprised to see how heavily the target-date fund in their 401(k) is invested in equities. The asset allocation in these funds starts out with a high percentage in stocks and becomes more conservative as you get closer to your target retirement date. A big equity stake isn’t necessarily a bad thing as long as you don’t need to cash out into a down market — which can happen if you switch jobs or if your company has layoffs — but it’s good to be aware of how risky your investments are.
Ideal savings: By age 30, a saver should have at least one year’s worth of salary saved, according to Fidelity; at 40, the goal is to have three times their salary socked away.
Those in their 40s and below have a secret weapon to catch up for retirement: time. As interest and capital gains compound over the years — particularly in tax-advantaged retirement savings accounts like 401(k)s and IRAs — early savers have the power to grow their investments exponentially. After-tax money put into a Roth account is also a very powerful way to build wealth, since investments can compound over many years and, unlike with 401(k)s and IRAs, you won’t need to pay income tax on the money you withdraw decades down the line.
But the current market fluctuations also provide another useful tool for savers. Basically, it’s an opportunity to buy valuable stocks at a discount.
“These are the markets where you make money as an accumulator, and you want to buy stuff at a discount and sell at a higher price down the line,” said Morningstar’s Benz. She suggests automating investing both inside and outside of 401(k)s. “It’s that invisible hand that reaches into your account and takes money out each month, so you don’t have to think about it.”
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