Will you need to downsize in your retirement?
Many families plan to adjust their lifestyles in retirement. Say, they swap the family home for a smaller one. Or they move to a less expensive community. When it’s an option, it can be a great way to slow down and increase the value of your portfolio.
Unfortunately, for many families, downsizing just won’t be an option. This would be a necessity.
That’s the result of a recent study published by Boston College’s Center for Retirement Research. The CRR researches many different financial and lifestyle issues surrounding modern retirement and publishes a statistic called the National Retirement Risk Index. This index measures how many households will have less retirement savings in the coming years.
For hands-on help with your retirement planning, consider getting matched with a vetted financial advisor for free.
What does the CRR study say
CRR’s findings are stark. Fully half of the country’s working-age households will not have enough money to maintain their standard of living after retirement. Making matters worse, this study assumes a robust working and savings life in which people work until age 65 and annuitize their assets, and even account for Social Security income.
Instead, millions of households will have to cut back on both luxuries and necessities in order to survive, according to the CRR’s findings. The specificity will be based on the needs of any individual. In some cases, retirees may not be able to enjoy some of the same things that brought them joy during their working years. For example, they may have to go out to dinner less often, or they may no longer be able to travel.
For others the situation will be more dire. To survive, retirees may have to sell valuable assets like the family home or give up necessities like food and medicine.
The National Retirement Risk Index is based on the concept of income replacement. Essentially, how effectively can a retirement portfolio’s income replace working income? It’s not a one-to-one relationship, because once retired, most families need less money to maintain the same standard of living on a daily basis. For example, you no longer have to save for retirement. You typically pay less in taxes, no longer have a dependent to support, have paid off the mortgage on your home and have lower costs in general. For many families, the rule of thumb is that the same standard of living Your retirement portfolio needs to replace 80% of your working income to maintain it.
Yet half of all households will fall at least 10 points below the 80% mark at which the NRRI considers a household to be “at risk”.
Less prepared for retirement – a widespread trend
It’s the latest survey to emphasize what financial experts have been warning about for years: A retirement crisis is brewing in America.
In the late 1970s and early 1980s, the economy transitioned from “defined benefit” retirement plans to what are called “defined contributions”. Instead of receiving guaranteed pensions from their employers, most workers were enrolled in the now commonplace 401(k) plans. However, the system has struggled to keep up with the needs of the workforce, and for decades there has been growing concern that families simply haven’t been able to save the money they’ll need to pay for retirement.
The National Retirement Risk Index has consistently found this to be the case. Since 2004, it has been found that almost half of the households surveyed do not have the money they will need to maintain their standard of living in retirement.
First, older generations were less at risk, as many older households in 2004 still reflected the more generous retirement plans and pay scales of previous eras. However, in recent publications, that distinction has been erased. Now NRRI finds equal risk across all age groups. The Center has broadly got it right across most income groups as well. Even among high-income households (defined as $85,000/$248,000 or more for single/married households), 41% of all households surveyed have below their replacement level of savings.
There are many proposed solutions for what policymakers can do to address this crisis. Yet arguably the two biggest issues when it comes to addressing the retirement crunch are time and money.
From a timing perspective, effective solutions will vary in different households. Policymakers may be able to help young families through a range of employer- and tax-based options that could help people earn more income and save more in their retirement accounts during their working lives Is. This can be an effective solution for someone who has decades of growth left in them. However, the problem is equally acute for families who are only a few years away from retirement, and do not have time to catch up through savings and investments. Families nearing retirement are likely founders without a simple plan for getting more money.
What is the other problem? Ultimately, the retirement crisis is about money. Families need it more, and it has to come from somewhere. Whether the government spends this money directly through a Social Security overhaul or whether an employer does so by reinstating pensions or boosting benefits and payments, it comes down to someone, somewhere cutting the check. . Finding those funds is one of the biggest problems when it comes to solving the retirement crisis.
However, that solution needs to come soon, as the Boston College findings make quite clear. For millions of Americans, retirement will not be something they look forward to. It will be an era of struggle and scarcity.
But this should not be your own experience.
Saving for retirement is a huge project that should be on hold for your entire career. Ideally, you can start setting aside money as soon as possible. Even a small amount of savings in your 20s can add up to a significant nest egg by the time you reach your 60s. If you have kids, you can do the same for them. Making a modest contribution to a portfolio that can grow over 60 years will be one of the best ways you can help young children get a head start in life. But no matter what age you are, it’s never too early or too late to start.
Beyond that, the rule of thumb is 10%. Whenever possible, set aside 10% of your salary for retirement savings. If you have an employer matching 401(k), max that out, then Roth IRA and Roth 401(k) accounts.
Don’t just rely on rules of thumb though. Use tools like our Retirement Calculator to reverse engineer your savings plan. Think about how much money you’ll need in retirement, then work backward to figure out how much you’ll need to contribute to reach that goal. Even if the numbers are large, it is better to have a clear plan than to make a best guess.
Finally, if you need to change your standard of living in retirement, start planning for that early. Again, by understanding what you can contribute and how it can grow over time, you’ll have a sense of what’s possible with your retirement account. Build your plan from there. This will give you a degree of control over how to change your lifestyle, so that you can make cuts rather than scrambling to meet your needs as they arise.
ground level
The Center for Retirement Research at Boston College just released its latest National Retirement Risk Index, and its findings are grim. Fully half of Americans who can retire forever will need to cut their standard of living.
retirement tips
- you have worked You saved You have a portfolio that is moving along. So, with all this going for you, how can you know when you are ready to retire?
- But the best way to know how your retirement planning is doing is to get professional help. A financial advisor can help you save and plan for retirement. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which is right for you. Is. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credits: © iStock.com/Dean Mitchell, © iStock.com/shapecharge
Eric Reid Eric Reid is a freelance journalist specializing in economics, policy and global issues with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of intangible issues, with an emphasis on analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, including Sao Paulo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist, Eric worked with a pro bono specialty in human trafficking issues in securities litigation and white-collar criminal defense. He graduated from the University of Michigan Law School and can be found on any given Saturday cheering on his Wolverines.
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