Strategies for Reaching Your Retirement Goal
Most people look to Social Security, a pension, and personal savings to fund their retirement. But what happens if these retirement benefits don't add up to a hill of beans, much less a mountain?
There is not much you can do about Social Security or a pension— those benefits are outside your control. But you do have some say over your personal savings, particularly a tax-deferred retirement plan.
Four Ways to Try to Make Up for a Shortfall
The following strategies could help if you find yourself coming up short of your retirement goal.
- Save More
Contributing a little more money each month to your retirement savings plan may help you meet your income goal, especially if you have a moderate to long investment time horizon (10 years or more). Set a goal to "max out" your tax-deferred contributions even if you have to do so a little at a time. Then let time and compounding take over.
- Invest More Aggressively
Many retirement investors fall into the trap of choosing so-called "safe" investments. While there is a place for capital preservation investments in a retirement portfolio, placing too much reliance on them can result in lower potential compound growth over time. Selecting investments with the potential to earn a higher average annual return may help you close your gap without sacrificing your lifestyle (of course, the more aggressively you invest, the greater your potential risk). You would be amazed what even one additional percent of return (particularly within a tax-deferred environment) can add to your personal bottom line.
- Reduce Your Income Goal
Another way to reduce your shortfall is to reduce your retirement income goal. While not as appealing as saving more or investing more aggressively, it is a possible solution. But remember financial professionals suggest you will need income equal to at least 60% to 80% of your final working pay to maintain your current standard of living in retirement.
Take a hard look at how much money you really believe you will need each year in retirement. Pull out a piece of paper and itemize your current expenses. Then consider which of those expenses will increase or decrease when you retire.
- Plan to Retire Later
Delaying your retirement date is another alternative. Doing so gives you more years to save and less retirement years to fund. Delaying your retirement date may also increase your annual Social Security benefits, under current tax law. You can start receiving reduced Social Security benefits at age 62 and maximum benefits at age 67. You may receive increased benefits if you retire after age 67.
Consistency Helps in Reaching Goals
Which of these strategies is best for you depends on your situation. Don't be startled if your current personal savings are not enough to reach your financial goal. Unless retirement is right around the corner, you'll be contributing to your savings plan for years to come.
Consistent savings and investing—together with compounded, tax-deferred growth—have the potential to help you reach your retirement goal.