Financial advisers working with clients who are woefully unprepared for retirement may want to offer them some advice on how to bridge the gap between how much those clients will collect in Social Security and what they're likely to spend over the course of their retirements.
An estimated 42 million Americans are receiving Social Security benefits, with the average annual payment totaling about $16,260 a year. On that fixed income, however, a 65-year-old male would need more than $1 million in investable assets to keep pace with average national spending over the next 30 years, according to report released Tuesday by the Insured Retirement Institute.
(More: 10 dos and don'ts for late-blooming retirement savers)
“We know there is a significant percentage of the boomer population that will rely on Social Security into retirement,” said IRI president and chief executive Cathy Weatherford. “But I think baby boomers are among the most creative generations. They've worked the hardest to redefine every stage of their life, and I know they will be quite ingenious about the ways they can close this gap and figure it out.”
The IRI has put together four pieces of advice to help boomers close the income gap.
Don't retire until 70
Delaying retirement until age 70 can yield significant financial benefits for retirees. Retirees who wait until 70 to begin collecting on Social Security can receive 132% more in benefits than if they started collecting at 65.
Ms. Weatherford cited an increase in part-time work, contract work and a growing entrepreneurial spirit into retirement as ways that older individuals can close the income gap.
“Boomers certainly have a network, contacts, knowledge and experience to build a startup, so it doesn't surprise me that they are becoming more entrepreneurial," she said.
Increase retirement savings contributions
Individuals 50 years and older are allowed to contribute an additional $6,000 annually to workplace retirement plans. If it is made between the ages of 50 and 70, that annual $6,000 “catch-up” contribution may increase retirement savings by $293,000 — assuming a 5.5% pre-tax investment return.
(More: Gen X lags boomer generation in retirement savings)
Move to an area with lower expenses
With a cost of living index at double the national average, Manhattan may not be the best place to retire on a fixed income. Instead, research shows that retirees may want to head south and west to a city with a low cost of living. Cities with the lowest indexes include Harlingen, Texas, where it costs about 83% of the national average to live, or Pryor Creek, Okla., and McAllen, Texas, which come in at 84% and 85%, respectively.
For boomers, that may mean getting rid of the single detached home that was a major component of the American Dream. “Eventually people will need use that large asset that they have paid off or now have a low mortgage on to downsize a bit,” Ms. Weatherford said. “The upkeep of a detached home is much more expensive than that of a smaller property.”
Keep healthy
Medical expenses add up for retirees. Keeping healthy can cut annual medical expenses by reducing the risk of developing heart disease, diabetes or other costly illnesses. “As an aging boomer, this is something I'm working on as well,” Ms. Weatherford said.
