How To Avoid A $2,100 Monthly Shortfall In Your Retirement Income

In a recent study, Fidelity Investments revealed that, among other things, 38 percent of current retiree households do not have sufficient income to cover their monthly expenses, and Baby Boomers (those born between 1946 and 1964) are at risk of facing a $2,100 monthly shortfall when they retire.  “While there is evidence that Americans are saving more for retirement, our analysis finds that they need to take additional steps to prepare for the future and take better control of their personal economy,” said Kathleen A. Murphy, president, Personal Investing, Fidelity Investments. 

Although the survey sample was small and geographically dispersed, it is nonetheless a wakeup call to all of us to get our retirement planning in order.  What can we do to ensure that we have enough savings to support us throughout our post-retirement lifetimes?  Here are a couple of suggestions.

1. Know where you are.  

You can’t fix a problem until you identify it.  You should put together a retirement plan that identifies your goals and expenses during your post-retirement years, the funding needed to support them, and how much you need to be saving and investing now on order to reach them.  If you can’t do it yourself, get professional help from a financial planner.

2. Diversify your investments appropriately.

Fidelity found that 21 percent of those surveyed were invested too conservatively with limited exposure to stocks, based on their current age and planned retirement date.  Having sufficient exposure to more diverse types of asset classes can not only improve returns but also reduce overall portfolio risk.

3. Take advantage of tax-deferred and tax-free savings.

Your investments will grow faster when you postpone or eliminate taxes on their returns.  In addition to workplace retirement savings accounts such as 401(k)s, there are personal IRA and Roth accounts that you can utilize.  In addition, by locating tax inefficient investments (such as bond mutual funds that generate a lot of income) in tax-deferred or tax-free rather than in taxable accounts, you will further improve your savings growth rates.

4. Utilize Social Security and other annuities wisely.

If you’re already a retiree, an annuity providing guaranteed lifetime income may be a good alternative for those without company pensions.  But choosing from the many kinds available can be complex.  Social Security in its current form is one of the only annuities available that adjusts payments based on actual inflation, which is a great benefit.  And as I’ve written in a previous article, you can further increase your Social Security benefits by following some creative (but legal) strategies.

In addition to the primary strategies listed above, you have the option of saving more and working longer, although neither may be practical for your particular situation.  There are also ways of tapping into your home equity, either by downsizing or by utilizing a reverse mortgage.

Putting together a retirement plan should not only help you improve your retirement finances but also your financial peace of mind.  And in these stressful times, what could be more valuable?