Closing the Gap: How to Determine Your Retirement Income Needs

Since your youth, you've worked hard. You have contributed to your 401 (k), are making responsible financial decisions, and retirement is just around the corner. Are your retirement savings sufficient?

 Even with a well-planned retirement budget, rising costs of health care and unexpected expenses can take more of your savings than -youth.

What is a retirement gap?

A retirement gap is money that you are on track to have at your retirement age but is not enough to allow you to retire how you want.

Use a retirement income calculator to determine if you have any retirement gaps and how large they could be. However, it can be difficult for an online tool that cannot predict your future because it doesn't know your lifestyle. So instead, you might consider adding up all of your possible retirement income sources, including your 401k, Social Security, Individual Pension Account (IRA), pension, and other investments. 

Next, estimate how much you will need for retirement, whether lump sum or monthly. Then, add the amount you'll need to get the projected amount. The amount that you are not earning in retirement is your income gap. Again, talking to a financial advisor can help you see the bigger picture.

If you have a retirement savings gap, all may not be lost. You can take steps now to close the gap, increase savings and make sure you can sustain yourself in retirement.

How to close the retirement income gap

You can close the gap in retirement income by increasing your savings. Begin by reviewing your budget and then reducing your spending on vacations and restaurant meals. To pay off high-interest credit cards faster, you can transfer them to a card with a lower rate, such as LGFCU's Visa (r) Credit card. Next, maximize catch-up contributions to your retirement plan or IRA.

Semi-retirement is a way to adjust your retirement goals if you don't want the whole retirement experience. Perhaps you have imagined a retirement where you can relax in a hammock on an island. 

Reconsider your investment strategy. Talk to a financial expert about finding the right mix of investments to grow your retirement savings. You may be able to bridge your retirement gap by setting up a Share-Term Certificate that has staggering maturity dates. You can take small steps to cover your retirement savings gap.

Strategy 1: Retire early: 65 is a number.

You can deal with a projected income gap by staying in the workforce longer than you planned. 

If you are not yet 65, your Social Security retirement benefits may be affected by income earned from a job. However, for every $2 earned above a specific earnings limit, you can still make as much as your Social Security retirement benefits once you reach the average retirement age.

Delaying retirement has another advantage: you can build tax-deferred, or in the case of Roth accounts, tax-free funds in your IRA. However, to avoid severe penalties, you might be required to take minimum distributions from your traditional IRA or qualified retirement plan once you turn 70 1/2.

You might think about retiring if a pension plan in your workplace covers you. You can get a salary and your pension benefit while you work. In addition, some employers offer "phased retirement" programs to avoid losing talent, which allow you to receive a portion or all of your pension benefits while you work. You should be familiar with your options for pension plans.

Strategy 2: Save more, spend less

Adjusting your spending habits may help you deal with a low income. You may be able to make a slight adjustment if you are still many years away from retirement. However, if retirement is not far away, you might need to make drastic changes in your savings and spending habits. Even a small amount of money saved can add up over time if it is done consistently and at a decent rate of return. You'll be able to save even more money if you make permanent changes in your spending habits. To see where your money is going, you should start by creating a budget. These are some suggestions for ways to stretch your retirement savings:

Refinance your mortgage if interest rates have fallen since you took out the loan.

You can reduce your housing costs by moving to a cheaper home or apartment.

If you own two cars, consider selling one. Also, consider buying a used car if your last car needs repair.

You can access the equity in your house. To pay higher-interest debts, you can use the proceeds of a second mortgage or home equity credit line to fund your repayments.

Transfer credit card balances from higher interest cards to low- or zero-interest cards and cancel the accounts.

Ask about insurance discounts, and consider your insurance needs (e.g. your need for insurance to cover your life).

Reduce discretionary expenditures such as lunches or dinners out.

Save money for retirement. You can immediately invest the money. You should consider an IRA, 401k, or another tax-deferred retirement program. A tax-deferred account can grow faster than funds in a non-tax-deferred one.

Strategy 3: Reallocate assets and invest more aggressively 

Many people make the error of investing too conservatively to reach their retirement goals. It is not surprising as more risk means more significant potential loss. However, greater risk generally means greater reward. Retirement funds must last long, as people are retiring earlier and life expectancies increase.

If you're facing an income shortfall, you might want to shift some of your assets to investments with the potential to outpace inflation significantly. Your time frame (how much money you can save) and risk tolerance will determine how much you invest in growth-oriented investments. The longer you have before retirement, the more aggressively you can afford. Even if your retirement is near, it's a good idea to invest some of your money in a growth-oriented investment, even if most of your investments are more conservative and fixed-income. If you have any questions about allocating your assets, consult a financial professional.

Remember to rebalance your portfolio regularly, regardless of how you allocate your money. Your investment strategy should change with your needs. Rebalancing can have tax implications. Diversification and asset allocation cannot guarantee a profit or ensure against loss. Any investment strategy is not guaranteed to be successful. All investing comes with risk, including possible loss of principal.

Strategy 4: Accept the truth: Lower your standard of living

You may find that you cannot afford to retire with the lifestyle you want, no matter how hard you try. Unfortunately, you'll need to reduce your expectations and accept a lower standard.

Sources:

https://www.lgfcu.org/personal-finance/closing-the-retirement-gap

https://www.fbfs.com/learning-center/4-strategies-to-close-your-retirement-income-gap