(This article appeared previously on MarketWatch.)
Half of us need to make serious financial changes — or we won’t be able to maintain our standard of living once we’re retired.
According to the National Retirement Risk Index created by Boston College’s Center for Retirement Research, 52 percent of households will see their standards of living fall if they opt to retire at age 65, up from 30 percent in 1989.
The drop-off has been driven by a host of factors, including rising life expectancies, falling bond yields, the disappearance of traditional pension plans
and the rise in the Full Retirement Age
for Social Security benefits.
Sound bad? It gets worse. In estimating how many of us face a penny-pinching retirement, the index assumes folks retire at age 65, yet most people retire earlier. It also assumes that seniors take out reverse mortgages and buy income annuities. Many folks resist these strategies, even though they can increase retirement income.
(MORE: How to Avoid Outliving Your Money)
Faced with such grim statistics, the standard response is to exhort Americans to save more.
That’s obviously a good idea, though it works best for folks who are further from retirement. What if you’re close to retirement age? In addition to saving like crazy, consider the following four strategies:
1. Work Longer
This suggestion often triggers an exasperated response from readers who are forced out of their jobs or who find work becomes too physically demanding.
“We’re big advocates of trying to work longer
,” says Alicia Munnell, director of the Center for Retirement Research and co-author of Falling Short
, a new book devoted to the retirement crisis. “It’s a prescription that works for the bulk of the population. But it’s not possible for everybody.”
Let’s say you can find part-time work that pays just enough to cover the bills. That could still give your retirement a huge financial boost by allowing you to leave your nest egg untouched for longer, while also delaying Social Security.
On top of that, working at least part-time may give a sense of purpose to your early retirement years.
Remember, your retirement might last 20 or 30 years. That’s a long time to sit around “relaxing.”
2. Buy An Annuity
To squeeze maximum income out of your savings, often the best strategy is to buy a lifetime-income annuity. Sure, there’s a risk you’ll die early in retirement. But in return for taking that risk, you can enjoy attractive monthly income.
The price of this “annuity:” You would need to draw more heavily on your savings during your initial retirement years.
Social Security is “such stupendous income,” Munnell argues. “It’s inflation-adjusted and you get it for as long as you live. If you can get as much of that as possible, you’ll be in solid shape.”
3. Tap Home Equity
Munnell’s research center calculates that the median wealth of households approaching retirement age is just under $600,000. Much of this is accounted for by two “assets:” the value assigned to the income streams from Social Security and traditional pension plans.
What’s the next biggest asset? That would be home equity
, which you might tap by trading down to a smaller home. That would free up money that can be spent, while likely also reducing your living costs.
But maybe your home is already modest, or you prefer not to move. The alternative is to take out a reverse mortgage. I’m not crazy about reverse mortgages — but I’m also not crazy about folks spending their retirement pinching pennies.
“People don’t want to tap home equity,” says Munnell, who notes that she is an investor in a reverse-mortgage lender. “They see it as a reserve and they’d like to leave it as an inheritance. But what was possible in the past may not be possible today. I hate to think people might scrimp unnecessarily.”
4. Cut Spending
The lower your fixed living costs
, the more financial breathing room you’ll have — and the more you can spend on discretionary expenses like travel and eating out.
Key fixed costs include rent or mortgage, other debt payments, property taxes and car costs. Two obvious moves: Try to get all debts paid off by retirement and consider moving somewhere with a lower cost of living.
Jonathan Clements is a MarketWatch contributor and a columnist for the Wall Street Journal Sunday Journal.
By Jonathan Clements
Jonathan Clements, author of Jonathan Clements Money Guide 2015
, is the personal-finance columnist for The Wall Street Journal Sunday and was formerly Director of Financial Education for the U.S. wealth-management business of Citigroup.
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