How to be Prepared for Retirement With Less Than $500,000 in Savings

Let’s discuss retirement planning for the “average Joe”.

As an example, today we’ll use a 61-year-old teacher who plans to work 4 more years before retiring. With her teacher’s pension and her husband she can expect between $5,200-$6,000 per month in lifetime pension benefits. Let’s assume her husband is about the same age and between the two of them they have $300,000 in IRAs, Roth IRAs and her 403B as well as a small investment account and about $60,000 in cash. Combined they will also have around $3,000 per month in social security income (SSI).

Does this seem like enough? How prepared is this couple for retirement?

So, let’s also say they will have their house paid off in 3 years ad it’s worth about $275,000. Cars are paid off and they currently have very little debt. But other things to consider are perhaps the husband may not be able to work in his current job much longer due to health issues. He might actually need to retire before 65. The couple estimates that they will need about $45,000-$50,000 per year for retirement. They may also have to take care of one parent who is in their 90s.

These are all things that today’s “average Joe” might be facing as they enter retirement, right?

It’s easy to understand the concern they would feel about their security as they get closer to retirement, but at least this couple has a secret tool so many Americans wish they had: a pension outside of social security.

In this case, they have income sources and having that pension on top of social security is powerful. Quite frankly, the average wealth adviser would tell this couple they seem to be on track. But the next two to four years will be pivotal for them.

There are four contributing factors that greatly affect one’s retirement security- longevity, because the longer you live, the longer you need your money to last: the return rate on your investments, hard losses during market declines, and your spending. It’s pretty important, as you approach retirement that you take charge of your situation and take steps to help you live comfortably for the rest of your life. In short, take steps to make your money last.

So, how does someone do that? First, make sure you have gone over your spending and your estimated expenses again and again before you quit. List out every cost you think you’ll have in retirement, and pore over your current spending, such as analyzing your last few credit card statements.

You’ve mentioned how much you think you will need annually in retirement, but does that include taxes? Or healthcare, which only gets more expensive the older you get? In this example, if it is truly $45,000-$50,000 a year you’ll need, that’s great, but they must be sure of that before entering retirement, so they aren’t spending so much time worrying about paying bills.

It would also be smart to set aside some cash savings for emergencies, because unexpected things happen whether you’re retired or not. If you are only a few years from retirement like this couple, you should also consider increasing your contributions to your retirement accounts if you can.

Inflation is a big point to consider these days, and everyone should account for it in the decades to come. Social Security has a cost-of-living adjustment, although not everyone agrees it is as well-aligned with inflation of the goods and services older Americans spend their money on, but it still counts for something. If you have a pension, you should also check if it is inflation-adjusted, and if not, factor that into your future spending needs when estimating your expenses for retirement every year.

A financial professional can help you with this. Not everyone wants to work on a monthly or annual basis with a financial professional, but firms like Summerlin Benefits Consulting can go over these concerns with you and try to help you plan for the future. One thing Summerlin Benefits Consulting specializes in is fixed index annuities, which can be a great tool to establish supplemental income, prevent loss, and make your money last for life. These accounts can even help prepare you for future expenses like long term care.

Now, there is no right answer for when to claim Social Security, but it is important to consider all of the options. Waiting until you are older to collect can be a fantastic goal, but if it has to be taken a bit sooner, that would be OK too.

Longevity plays a huge factor in Social Security claiming strategies- people who don’t live much longer past 70 don’t get to enjoy the benefits they paid into all this time. Others use benefits from Social Security and fixed index annuities as a way to avoid tapping into their retirement savings, so that the money can continue to grow in an investment portfolio. Plenty of couples talk through strategies so that they’re maximizing their benefits for their personal situations.

Another good step is to try to estimate what you think your tax situation will be like in retirement versus now so you’re making the best decisions for yourself. Understanding what taxable income you’ll have from your retirement income sources will help with long term planning. For example, you don’t put money in a Roth if you expect to take it out in a relatively short period of time because it just doesn’t provide the same tax benefits to you. It’s often better to save your tax-free income for later down the road if you can.

Additionally, Indexed Universal Life Insurance is a great way to leave behind inheritance for loved ones and can also provide another tax-free income source that you can draw against in the form of a loan from its cash value.
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At Summerlin Benefits Consulting, we specialize in safe money strategies that not only help retirees protect their money, but also make their money last for life.