What to Do If You Face a Financial Shortfall in Retirement

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More than 40% of American households headed by someone between 35 and 64 years old are likely to run short of money in their retirement years, according to a recent report from the Employee Benefit Research Institute (EBRI).

How short? It varies depending on marital status and age. Widowers age 60 to 64 fell $12,640 short, for example; widows had a $15,782 shortfall. But single people in that age group fare much worse, and single women have the most yawning gap. Single men are projected to have a $24,905 shortfall and single women can expect a $62,127 deficit.

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This is worrisome news, especially as 37% of already-retired Americans fear that they will outlive their savings, according to the Transamerica Center for Retirement Studies.

As with so much, though, planning is the answer. Here are steps to ward off a potential shortfall.

1. Project your financial needs in retirement as early as possible

Develop a clear idea of how much money you will need in retirement. It's important to develop that as early in life as possible, because it gives you a plan for how much to save in your retirement nest egg. The earlier you begin to save for retirement, the more your money can grow over time.

Generally speaking, Social Security is designed to provide 40% of pre-retirement income, but retirees are projected to need 80% of that income level to live comfortably. So if you are set to make $60,000 at retirement, you'd need a yearly retirement income of $48,000 to hit 80%.

The average Social Security payment currently is around $17,500 per year. That'd leave you needing another $30,500 annually to come from a nest egg if you want $48,000 a year at retirement.

Once you know your annual projection, you can figure out the nest egg you need. There's a guideline: Multiply the income you want in retirement by 25. The result -- in this example, $762,500 -- is what you want to have saved by retirement.

If you start at 35, for example, and save $560 per month until you are 67, you will end up with a nest egg of just over $764,000, assuming an average yearly return of 7% (roughly average for the stock market).

2. Save as much as possible

Once you have an estimate of the amount of the nest egg, you need to have a savings plan.

If you have access to a 401(k) plan through work, it can be an excellent choice. Folks can save up to $19,000 per year via 401(k)s ($25,000 if you're 50 or over) in 2019. The money is taken out pre-tax, so you also save on your tax bill.

These plans can be especially helpful because many companies offer a 401(k) match, meaning your employer matches a specific percentage of your contribution. Matching contributions are usually 50% to 100% of what you contribute up to a certain percentage of your salary, often between 3% and 6%.

So if you are aiming at a $560 contribution per month to hit your goal, but are eligible for a 100% match on the first $200 per month that you put in, then you actually have to contribute only $360 of your own money to reach that $560. The other $200 comes from the employer match.

If you don't have access to a 401(k), not to worry. Individual retirement accounts (IRAs) are also excellent tax-saving retirement vehicles. People can contribute up to $6,000 per year ($7,000 if you're 50 or older).

You have a choice of two types of IRAs: traditional and Roth. In a traditional account, your contributions are tax deductible in the year you contribute. The money grows tax-deferred; you will be taxed when you withdraw the money upon retirement.

Roth IRA contributions, on the other hand, are not tax-deductible when you contribute to them. Like their traditional siblings, the contributions grow tax-deferred. Then, when you withdraw the money at retirement, it is not taxed, as long as you meet the appropriate requirements for the account.

3. Consider downsizing and moving to a more affordable area

What if you haven't saved much for retirement and it's looming? Or what if you can't save as much as you need to maintain your pre-retirement lifestyle even if you do put away as much as you can afford?

Fortunately, there are more pieces to the retirement puzzle than just saving and investing (crucially important as those are). Cutting large expenses can also be part of ensuring you don't fall short in retirement.

If you have a large house or live in an area where home prices are exorbitant, you may be able to save a bundle by downsizing and moving to a more affordable area. Many retirees feel great relief at having a smaller home (less maintenance!). And smaller homes and condos can be much cheaper.

More-affordable areas can also have lower property taxes; lower local or sales taxes; and a lower cost of living overall for necessities like utilities, transportation, and so on. In a 2018 survey, the five best states for retirees were Florida, Colorado, South Dakota, Iowa, and Virginia.

4. Work as long as possible

The classic definition of retirement as "no more work" is becoming increasingly outdated. The number of people between 65 and 74 in the workplace was projected to rise 4.5% per year from 2014 to 2024, according to the U.S. Bureau of Labor Statistics.

Even a part-time job can bring in needed income during retirement. You may be able to stay on part time at your company, or become a consultant. If not, there are a number of interesting potential jobs for retirees.

5. Maximize your Social Security benefits

Social Security benefits are not a static amount. In many cases, if you wait longer before receiving them, you'll get larger monthly payment.

You're first eligible to receive Social Security at 62. But that benefit is reduced from what it would be at your full retirement age (FRA), which is 67 for people born in 1960 or after, 66 for people born between 1943 and 1954, and 66 and incremental months for those born between 1955 and 1959. So it's more financially advantageous to take your Social Security benefits at your FRA than at 62.

And Social Security retirement benefits rise 8% for every year you elect not to take them past FRA. So if your FRA is 67, you could receive 24% more if you wait until 70 to claim Social Security benefits. If you're eligible for the average monthly amount of $1,461 at FRA, for instance, that 24% boost means $1,811 instead at 70 -- $350 more per month.

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