How to Make Retirement a More Realistic Prospect

Market volatility and changes to Social Security and Medicare have changed the way many U.S. workers save for retirement, but insufficient planning and savings are still the main threats to post-work plans.

Workers of all ages are experiencing financial hardships and debt that have taken precedence over retirement planning and saving. According to the 2013 Employee Benefit Research Council Institue Retirement Confidence Survey (EBRI), 41% of workers said the top reason they aren’t contributing or aren’t saving more to a retirement plan is because of daily expenses and the cost of living.

What’s more, the EBRI estimates that the average U.S. household headed by people ages 55 - 64 has an IRA or 401(k) valued at about $120,000, yet the group projects a 401(k) balance of $900,000 to last someone for an extended retirement.

“People these days are much more active and they’re doing a lot more in their retirement years, so really they’re not spending less and in some cases, they’re maybe spending even more than they spend now,” says Bob Stammers, director of investor education at CFA Institute.

“People are also living a lot longer, so there’s this incredible longevity risk that they don’t realize the amount that you have to amass to retire in order to live for potentially 30 years after retirement.”

Although it may feel like an uphill battle to make up for lost time and savings, here are four factors experts recommend to make retirement a more realistic prospect.

Make Savings a Priority

While it may be financially difficult to increase savings and still make ends meet, experts recommend to really scrutinize a budget and look for any cutbacks.

“Doing little things, such as increasing a 401(k) contribution each year by 10% [and] reviewing your expenses and trying to reduce those expenses by 5% adds up,” says Howard Hook, certified financial planner and accountant with EKS Associates.

Working with a financial planner to re-evaluate a retirement savings strategy and to create an estimated budget will better define the amount needed to get there, recommends Joleen Workman, vice president of the individual investor segment at the Principal Financial Group.

“Add up your sources of income: worksite retirement plan, IRA, other personal savings, possible pension plan and Social Security,” she says. “Subtract the budget from the income and then you will know for sure what the gap is which will make it easier to build a strategy to bridge the gap.”

Plan to Work Longer

Although the thought of working  longer than planned may be a harsh reality, options such as part-time work, job sharing, and working from home makes working longer more flexible.

“What we are finding is that many people become bored once retired for a short period of time and, doing something they are familiar or comfortable with such as work, often creates a ‘happier’ retirement,” Hook says.

However, not everyone will have the option to stay in the workforce.

“In reality, nearly half—47%—of today’s retirees say they had to quit work before they planned often due to health reasons,” Workman says. “People need to save and plan as if they cannot work longer. If it turns out they are able to continue working, it’s a bonus.”

Downsize Living Expenses

For many homeowners, the equity in their home is their biggest investment asset and although there may be an emotional tie to the property, downsizing once children leave the nest can help fund retirement, says Stammers.

“For those who have planned it through, it can really help to extend your ability to live off your assets,” he says.

As many retirees are drawn to states with no income tax which can immediately improve their after-tax cash flow, it’s important to remember that income taxes are only one way states raise revenue and there may be sales, excise and estate taxes to consider, says Matt Sommer, director and senior retirement specialist at Janus Capital Group.

“Also, states vary in their treatment of retirement distributions and pensions, which is another thing to research before committing to a move.”

Cut off Financial Support 

Most parents wish to help their children regardless of their own financial situation, yet compromising retirement goals to help adult children with a large purchase like a home or co-signing student loans can impact future plans.

It’s imperative that parents discuss the reality of their retirement situation honestly and realistically, says Hook.

“Many times we find that either the parents or the children do not realize the harm it may have on the parents’ retirement,” he says. “The parents may be ashamed of their inability to help financially and children may not have a true understanding of their parents’ financial situation to know that helping them out may be problematic.”

Considering longer life expectancies and increased health care costs, it’s important to remember that while children can borrow for college, there are no loans for retirement, says Sommer.

“You should consider the long-term implications regarding your own retirement,” he says. “Generally, tapping your retirement nest egg should be a last resort and, if possible, avoided altogether.”