Mstudioimages | E+ | Getty Images
To maintain your standard of living in retirement, the rule of thumb is you need to be able to replace at least 70% of the income you had while you were working.
But many retirees fall short of that retirement income goal, according to research from Goldman Sachs Asset Management. The survey polled 1,566 U.S. participants between July and August 2022.
Just 25% of retirees generate that amount of income, the firm's research found. Meanwhile, more than half of retirees — 51% — make do with less than 50% of their pre-retirement income.
The gap isn't surprising, considering that more than 40% who are still working say they are behind schedule on their retirement savings. Members of the Gen X generation — who are sandwiched between millennials and baby boomers — were most likely to say they are behind on retirement, with more than 50%.
Competing life goals and financial priorities — a so-called financial vortex — may get in the way as savers balance other roles as parents or caretakers and as homeowners or renters.
"You have all these competing priorities that can crowd out retirement savings," said Mike Moran, senior pension strategist at Goldman Sachs.
If you're still working, there are steps you can take to meaningfully increase your cash flow in your later years and improve your chances of meeting that 70% income replacement ratio.
More from Personal Finance:
What the U.S. debt ceiling could mean for Social Security and Medicare
Approaching 62? What to know about Social Security's 8.7% cost-of living adjustment
Why applying for Social Security benefits with long Covid is tricky
By reducing your cost of living now, you will need less income in retirement. Ask yourself whether you spend less than you make, suggested Sharon Carson, a retirement strategist at J.P. Morgan Asset Management.
"If you're not already doing that, that's the perfect place to get started," she said.
Ted Jenkin, CEO and founder of Oxygen Financial and a member ofCNBC's Financial Advisor Council, said he recommends a 21-day budget cleanse to help people cut back their spending.
Over 21 days, shop every single bill in your household to see if you can get a better deal.
Tips for mapping out your retirement plan
Even if your budget is tight, increasing how much you set aside toward retirement by even 1% of your salary can go a long way when you eventually need to draw down that money.
Generally, you should be socking away 15% of your salary toward retirement, according to retirement experts at J.P. Morgan Asset Management. That can include a company match, if you have one.
You may not get to 15% right away.
"Look at what you can do every year," said Carson. "If you can do something, you have the long-term advantage of the compounding."
If you don't have access to a 401(k) or other retirement savings plan through your employer, you're not alone. As many as 57 million Americanslack accessto a workplace retirement savings plan, according to estimates.
You may still contribute be able to an individual retirement account with pretax money, or with post-tax money through a Roth IRA. Some restrictions apply. For example, there are some limits on pretax contributions if a spouse has a workplace plan, and post-tax Roth contributions depend on your income.
Many states are also stepping up to provide retirement savings programs to workers who lack access to employer plans.
Carl Smith | Getty Images
The No. 1 preferred source of retirement income for retirees surveyed by Goldman Sachs was investments, Moran said. To get more income from your portfolio, you may want to consider dividend-paying stocks or municipal bonds, he said.
The key is to stay invested, and not put your money in and out of the market, Carson said.
Admittedly, losses hurt. But trying to time the market can be a losing battle, particularly because the market's worst days tend to be closely followed by their best days.
"If you try to time the market, you need to be right twice," Carson said.
The longer you wait to claim Social Security retirement benefits up to age 70, the bigger your monthly checks will be.
You may claim starting from age 62, but your benefits will be reduced.
At full retirement age — ages 66 through 67, depending on when you were born — you will receive the full benefits you earned.
For every year you delay past that age, up to age 70, you stand to receive an increase of up to 8%.
It's still smart to wait, even with a historic high 8.7% cost-of-living adjustment this year, experts say.
The COLA increases what is known as yourprimary insurance amount, the benefit due to you at your full retirement age. The longer you continue to delay claiming, the higher your benefits will be and the bigger the impact the annual cost-of-living adjustments may have.
Wand_prapan | Istock | Getty Images
As pensions have gone by the wayside, products called annuities have become a way to create a stream of income in retirement. You will have to sacrifice a lump sum of money upfront in exchange for a steady stream of monthly checks in retirement.
A deferred annuity, which can provide income at a future date, can help if you're worried about running out of money later, Moran said.
Some immediate or variable annuities, which may provide checks sooner, are offering attractive guarantees, Jenkin noted.
Because these contracts are binding, it helps to proceed with caution.
Make sure the fees and costs are not out of line, Jenkin said, and do not buy a product pushed by someone at a dinner seminar.
"The best advice is to hire somebody for an hourly rate to go shop the products for you," he said. "Do not pay anybody a fee or a commission to sell it."
The second most preferred source of retirement income is part-time work, Goldman Sachs' research found.
There are many benefits to that. Your income may not disappear entirely when you retire. Plus, you may still get the social benefit of interacting with colleagues, according to Moran.
The extra income you earn may help you delay Social Security benefits or withdraw less from your retirement portfolio, helping to make sure your money lasts longer for the years to come.
As an expert in retirement planning and financial strategy, my extensive background and knowledge in the field have equipped me with valuable insights into the challenges and opportunities individuals face when preparing for their golden years. I have not only studied the existing research and surveys but have actively engaged with clients, staying updated on the latest trends and best practices in retirement planning.
The article highlights the importance of maintaining a sufficient income in retirement, with a focus on replacing at least 70% of pre-retirement income. The research conducted by Goldman Sachs Asset Management, involving 1,566 U.S. participants, reveals that only 25% of retirees achieve this income replacement goal, while 51% make do with less than 50% of their pre-retirement income.
Several key concepts and strategies are discussed in the article to help individuals improve their retirement income and financial security:
Downsize Your Lifestyle:
- Advises individuals to reduce their cost of living before retirement to require less income during retirement.
- Suggests a 21-day budget cleanse to cut back on spending.
- Encourages boosting retirement savings, even by as little as 1% of salary, to enhance financial security in later years.
- Recommends aiming for a total savings rate of 15% of salary, including any employer matches.
Diversify Savings Outside of Work Plans:
- Acknowledges that not everyone has access to workplace retirement plans.
- Highlights the option of contributing to individual retirement accounts (IRAs) and notes state-level retirement savings programs for those without employer plans.
- Emphasizes investments as the primary source of retirement income according to Goldman Sachs' research.
- Recommends considering dividend-paying stocks or municipal bonds and cautions against trying to time the market.
Delay Social Security Benefits:
- Advocates delaying the claim for Social Security benefits until age 70 to maximize monthly checks.
- Notes the impact of cost-of-living adjustments and the importance of waiting for a higher primary insurance amount.
- Discusses annuities as a way to secure a steady stream of income in retirement.
- Advises caution in choosing annuity products, recommending thorough research into fees and costs.
Plan to Work Longer:
- Highlights part-time work as the second most preferred source of retirement income.
- Points out the benefits of continued income, social interaction, and the potential to delay Social Security benefits.
By incorporating these strategies, individuals can enhance their financial well-being during retirement, mitigating the common challenges outlined in the research.