Opher Ganel, NerdWallet
Nearly 75% of US workers over age 60 feel they won’t be able to quit their jobs anytime soon, lacking the savings needed for retirement. But, with proper planning, enjoying your golden years is still within reach.
Among working Americans, 60-67 years old, only 26% said they had enough money to retire, according to PlanSponsor.com. And with rising inflation and a falling stock market, these numbers may get worse before they get better.
While these figures paint a bleak picture, the good news for workers in their 60s is that there’s still time to fix their finances and look forward to a comfortable life after retirement.
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How much do you need to retire?
In order to calculate how much you need to retire, it’s important first to estimate how long you will live.
According to the Social Security Administration (SSA) Actuarial Life Table, if you’re an American man aged 60, you can expect to live on average another 22 years. If you’re a woman, that number climbs to about 25 years.
Experts say you need 80 percent of your last salary to maintain your lifestyle when you first retire. A rule of thumb to generate this level of income from your savings is that you’ll need to accumulate a nest egg of about 20 times that last salary by the time you retire. Fortunately, Social Security retirement benefits may reduce that staggering amount into the range of 10-16 times your final salary.
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Estimate your Social Security benefits
When calculating your retirement benefits at your full retirement age (67 if you were born in 1960 or later), the SSA uses a formula based on your Average Indexed Monthly Earnings (AIME) with two breakpoints.
For AIME up to $1024 ($12,288/year), benefits replace 90 percent of your earnings. For AIME, between that and $6172 ($74,064/year), income up to the first breakpoint is still replaced at 90 percent, but the remainder is replaced at just 32 percent. For AIME above $6172, income up to the second breakpoint is replaced as above, while the remainder of income is replaced at a miserly 15 percent.
Here’s an example to illustrate how this works in practical terms. Assume your average indexed earnings are $80,000, and you currently earn $100,000. At $80,000 average indexed earnings, your retirement benefits from the SSA will replace about 40 percent of that amount, $31,700 to be more precise.
Assuming you need 80 percent, or $80,000, of your current $100,000 salary to retire comfortably, your own savings will need to cover $48,300 to supplement the $31,700 you receive in SSA benefits.
Using the 20 times rule, this translates to needing about $1.2 million, or 12 times your final salary.
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What happens if your income is much higher?
The higher your income, the smaller the portion of your average indexed income Social Security benefits replace. For incomes far above $74,000, the fraction slides down ever closer to 15 percent. So above that, the higher your income, the worse off you will be if you haven’t saved enough on your own.
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Can you even count on Social Security?
Many believe Social Security will go bankrupt in the next 10-15 years, so it won’t be there to help. Is that really so?
According to the Trustees of the Social Security and Medicare trust funds: “The Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034, one year later than reported last year. At that time, the fund’s reserves will become depleted, and continuing tax income will be sufficient to pay 77 percent of scheduled benefits.”
In summary, if Congress does nothing to fix the shortfall, Social Security will continue paying retirement benefits for the next 12 years. After that, benefits will drop by 23 percent. Not great, but it’s nowhere near the disastrous notion it will totally disappear soon after you retire.
Remember that between now and then, Congress can make changes to fix things and extend the trust funds’ liquidity for a few decades.
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What to do now
Every dollar you start saving for retirement now lowers your retirement need by $0.80. The best part is that this benefit starts immediately.
Reduce your spending by $100 a month, and your retirement needs will drop by $960 a year. It’s never too late to start. Not at 60 and not at any other age.
Also, don’t forget that many jobs these days can be done by people far older than 67, which still gives you more years to invest than you might expect.
There are four ways to boost your retirement savings: reduce your spending, increase your earnings, increase your annual returns, and delay your retirement.
Be as aggressive as possible in reducing spending. Categorize each spending item into one of three categories:
Unnecessary purchases you don’t use or bring you enough joy to be worth the costOverpriced things you can replace at a lower cost without impacting the quality of lifeNecessary items you need but could buy less frequently.For anything in the first category, cut it altogether. Replace things in the second category with cheaper alternatives. Those in the third? Try to buy them less often.
To increase your earnings, you also have various options. If you have a home, consider downsizing and finding a less expensive one where you’d be willing to live. Or try renting out a portion of your home to someone trustworthy.
Why not check if a reverse mortgage makes sense? Otherwise, you could start a side gig to bring in extra money, or if your employer offers a 401(k) plan with employer matching, invest at least enough to max out that match - it’s free money!
To increase your annual returns, invest your new savings as aggressively as possible. Since the stock market has historically returned more than six percent a year above inflation, invest as much in the market as you can bear without panic-selling when the market drops. If you’re uncomfortable investing in the stock market on your own, ask a financial advisor for help.
Delaying your retirement has multiple benefits. For instance, every year you delay Social Security benefits beyond your full retirement age will result in an eight-percent increase in eventual benefits.
Also, every year you keep working is another year you can save for retirement, and one year less your portfolio has to provide the retirement income you’ll live on in your golden years.
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It’s never too late to save for retirement
Even if you plan to retire in a year, saving and investing now will reduce your current spending, which will reduce how much you’ll need. It will also give your new retirement investments a bit more time to compound their growth. Finally, your reduced retirement spending may also reduce the taxes you’ll need to pay on your retirement income.
