What to Do If You Haven't Saved Enough for Retirement

By Wendy Connick Markets Fool.com

When you're young, it's easy to justify putting off saving for retirement. There are always expenses that seem more urgent than retirement, especially for someone starting a family while simultaneously launching a career. But once you start to approach retirement age, the gap between how much money you have saved and how much you'll need will become glaringly obvious. At this point, it's time to focus on saving your retirement.

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Find the gap

Before you can work on solving the problem, you need to know just how big the problem is. So your first step should be calculating exactly how much money you'll need every month in retirement to meet your basic expenses, and compare that to how much income you'll be making each month in retirement. The difference between those numbers is what you'll need to find a way to fix.

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Add up your expenses and income

Yes, writing up a budget is tedious and annoying, but it's a critical part of the process of saving your retirement from the jaws of financial disaster. Start by adding up your current expenses, then think about how those expenses will change during retirement. Most will go down, but you can expect healthcare expenses to rise over time. A retirement expense calculator can help quite a bit with this process. Next, look at your sources of income in retirement. You can pull up your Social Security statement online and see how much you'll be getting from the agency monthly; if you're within a few years of retirement, this number should be pretty close to the actual amount you'll get. Retirement savings accounts such as IRAs and 401(k)s are another likely source of income; depending on when you retire, you can safely draw 3% to 4% of these accounts each year without depleting them. If you're fortunate enough to have a pension from a current or former employer, include that number in the mix.

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If the financial gap is small: less than $100 per month

Let's say you crunch the numbers for your income and expenses and discover that you'll be short by about $50 per month. This is actually (sort of) good news, because a gap of less than $100 per month is usually fairly easy to make up. The first place to start is taking a look at your expenses. Is there any place that you are wasting money? Downgrading unnecessarily expensive cellphone plans, insurance plans, and so on may be enough to close your income/expense gap. If not, you may need to cut out some desirable but not necessary expenses, such as monthly subscriptions and part of your restaurant or entertainment budget (you did remember to allow for these expenses in your budget, right?). Another option is to cut your expenses pre-retirement so that you can really turbocharge your savings during the last few years before you retire; if you can make significant contributions to your retirement accounts, this may add enough retirement income to resolve your gap.

A moderate financial gap: $100-$200 per month

A larger financial gap will be more difficult to resolve if you're already pretty close to retirement age. One solution that can make a huge difference is putting off your retirement by another few years. First, that gives you several extra years to save retirement money instead of spending it, which will save you several thousand dollars. Second, delaying your Social Security benefits means that you will be blessed with "delayed retirement credits" that will increase the amount of Social Security you receive each month by 8% per year that you wait. These retirement credits will accrue each year between your full retirement age and age 70. If you can't or won't delay your retirement, you'll need to do some major expense-cutting to keep from running out of money. Consider downsizing your living situation, either by moving to a smaller house or apartment, moving in with family, relocating to a much cheaper area, or renting out a room. A reverse mortgage may also be a good option if you own your own home and it's mostly or completely paid off.

A large financial gap: more than $200 per month

If your projected income is nowhere near enough to meet your expenses, then simply cutting your expenses will probably not be enough to solve the shortfall. You'll also need to look for ways to increase your income during retirement. The simplest way to do this would be to keep your current job, but transition to a part-time instead of full-time schedule. If you can't make this happen, you'll need to look for part-time work elsewhere. Obviously, a part-time job you can enjoy would be the best option, so consider your skill sets and see if you can convert any of your hobbies into paid work. If that's not an option, you may, unfortunately, just have to pick up a part-time job that you dislike for a few years, until your income and expenses balance out a little better.

Ensuring you don't run out of money

Running out of money during retirement is always a risk, but it's a greater risk if you have just barely enough income to meet your expenses. A series of declining investments or a run of poor health that takes you out of work can cut a huge swath in your retirement savings. One way to minimize the risk of such a disaster is by diversifying your sources of retirement income. If you depend heavily on one or two income sources (say, Social Security and your 401(k) savings) and one of them fails, you are guaranteed to be in big trouble. But if you have five or six different sources of income, one source failing will be a hassle but probably not a catastrophe. Spread your assets out over both traditional and Roth retirement accounts, multiple investment options such as bonds and real estate, annuities, side jobs, and any other sources of retirement income that you can set up. Consider it a form of retirement insurance.

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