What Are Your Options if You Haven't Saved Enough When You Retire?

It's not an uncommon situation at all: Retirement is getting closer, and you're starting to worry that you haven't saved enough. Retiring without enough income or resources is a frightening prospect, and you're scared.

Indeed, according to the 2023 Retirement Confidence Survey, 33% of respondents have less than $25,000 in savings and investments (excluding the value of a primary home). That's clearly not going to get someone very far in retirement, as it's well below what most of us need to retire.

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How much do you need?

Everyone needs to take some time to develop a solid retirement plan, detailing how much income they expect to need and how they'll get it. Many people assume that $1 million provides all they need, but for some people, $1 million isn't enough.

It can help to figure out how much income you'll need in the future by figuring out how much income you are employing right now, and making some adjustments. (For instance, you'll likely spend less on clothing and commuting when retired, and probably more on healthcare.) It can be helpful to go through a budgeting process, examining your credit card and banking records and receipts, listing every expense.

To get a sense of how much income your nest egg will produce, you might use the 4% rule (one of many retirement withdrawal strategies out there) as a rough guide. It suggests that withdrawing 4% of your nest egg in your first retirement year and then adjusting subsequent annual withdrawals for inflation. The table below shows what a 4% withdrawal would be for nest eggs of various sizes:

Calculations by author.

So if you have $300,000 saved up, it might deliver $12,000 in your first year of retirement -- about $1,000 per month. You'll likely have Social Security, too, and the average monthly retirement benefit was $1,905, or close to $23,000 for the year.

What to do if you're behind

If it's looking like you're not where you should be in your retirement savings, you have a host of things you can do. Here are some powerful actions to consider:

• Work a little longer: Simply delaying your retirement can be a powerful move. If you work a few more years than planned, you can delay starting to collect Social Security, which will make your checks bigger. You'll also be able to save and invest more money, and your nest egg will have to help support you for fewer years. You may be able to stay on your employer's health coverage, too.
• Save much more aggressively: If you've been socking away $5,000 per year, can you do $8,000? Or even $10,000? The more you invest, the bigger a nest egg you can grow.
• Invest more effectively: Be sure to be investing effectively, too. For dollars you won't need for at least five, if not 10, years, it's hard to beat the stock market. And an easy way to invest in stocks is via one or more broad-market, low-fee index funds. An index fund will get you close to the same performance as its underlying index -- such as the S&P 500 -- and it's a fine way to save for retirement.
• Make good use of tax-advantaged retirement accounts: These include IRAs and 401(k)s, and both come in two main varieties -- traditional and Roth. You contribute money to a traditional account on a pre-tax basis, shrinking your taxable income and therefore your tax bill for the year of the contribution. A Roth account, on the other hand, is funded with your post-tax money, so your taxable income and tax bill will be unchanged. But if you play by the rules, all your withdrawals in retirement can be tax-free, which can be a big deal. If your employer offers matching funds for its 401(k) plan, be sure to contribute enough to max that out.
• Relocate to a less costly home: This may seem like an extreme move, but perhaps you have family or a lot of friends who live in a less costly part of the country. (Many retirees even move abroad, saving even more money.) Another possibility is staying in your same region, but moving to a smaller home that costs less in taxes, maintenance, utilities, insurance, and so on.
• Look into a reverse mortgage: A reverse mortgage involves receiving a lump sum or regular income from a lender via a loan -- with your home as collateral. Once you're no longer living in your home, the lender gets it, unless you or your heirs pay off the loan.
• Try to beef up your income before retirement: It can also be worth looking into whether you can get a better-paying job. You might need to earn a new credential, or gain new skills, but it can help you save more -- and it can end up increasing your Social Security benefits, too.
• Consider consulting a financial advisor: Finally, consider consulting a financial advisor, who can offer helpful guidance that might end up saving or making you a lot of money.

Acting on just a few of the ideas above might beef up your future financial security a lot. Don't leave your future to chance -- develop and act on a good retirement plan.