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Making Up For Retirement Shortfalls

The world is headed toward a retirement crisis, and America is no exception.  A study from Fidelity found that, while improvements have been seen recently, less than half of Americans will be able to maintain their current standard of living in retirement.  And a GAO report found that about half of all Americans age 55 or older have no retirement savings at all.  

Who will fall short and how short they will fall depends largely on age and marital status. Men do better than women, and formerly married people do better than single people.   The average retirement savings shortfall for widowers age 60 to 64 is about $12,640, for example, while widows had a $15,782 shortfall.   Single people have a much larger shortfall: single men are projected to have a $24,905 shortfall and single women can expect a $62,127 deficit.

This isn’t terribly surprising, given the backdrop of global economic uncertainty and the increase in both life expectancy and medical costs.  It is, therefore, more important than ever to create a comprehensive retirement cash-flow plan prior to retirement and keep it current as life plays itself out.   

Fortunately, HCM can help you understand the impact of utilizing one or more of the following strategies to help your retirement nest egg last as long as you do.

Get an Idea of How Much You’ll Need in Retirement

Everyone wants to be secure in retirement, but what does that mean for you?  Generally, people want to be able to maintain their lifestyles as they were before retirement.  Some have a “bucket list” of expensive things to do and places to go which require income to increase above pre-retirement levels.  Either way, it’s best to begin funding your plan early, while you’re still in your accumulation years (no worries if you’re a little behind – we’ll talk about how to “catch up” later in this article).  

Planners usually expect Social Security to cover 40% of your pre-retirement income and expect retirees to need about 80% of their pre-retirement income to live comfortably.   So, if you made $75,000 before you retired, 80% of that would be $60,000.  

The average Social Security benefit was $1,503 per month in January 2020, or  $18,036 per year.  That means you’ll need to provide about $42,000 from your savings to be at 80% of your pre-retirement income.  To get a rough estimate of what you’ll need in retirement, multiply the $42,000 by 25, which gives you $1,050,000 (assuming a 5% rate of return on your portfolio and 3% inflation, this should cover you for more than 30 years in retirement).   How does that target sound to you?  If it sounds doable, great, you’re on the right track.  If it sounds out of reach, maybe consider scaling down your expenses in retirement or supercharging your savings.  

Make up for Lost Time Saving

Not sure you’re on track to hit your target?  One way to get closer is to increase your savings rate.  Folks who are about a decade out from retirement are often ideally equipped to save more: they’re in their peak earning years, most big-ticket purchases (college, home) are behind them, the kids are most likely out of the house, etc.   Assuming you can avoid “lifestyle creep” (spending more rather than saving more with major expenses out of the way), this is a great time to put more money into your IRA, 401(k), or other retirement savings vehicle.  Although you have less time to have your money work for you through compounding, the tax code does allow you to contribute more to your retirement accounts than you could before: $25,000 per year can go into your 401(k) if you’re over 50 (compared to $19,000 for those below that cut off age), and savers with IRAs can sock away $7,000 annually, $1,000 more than people under 50 may save.   401(k) savings are taken out pre-tax, leading to potential savings on your tax bill.  These savings can be substantial.  Saving that extra $6,000 every year in your 401(k) from the year you turn 50 to the year you turn 65 results in an extra $167,000, assuming a 7% return in the market. If you can keep doing that until you’re 70, you’ll have an extra $269,000 in your account.  Also, many companies offer a 401(k)-matching program, so those additional retirement savings may be even bigger.

It’s important to save as much as possible as you approach the Fragile Decade (the 5 years before and after retirement).  This is because a bad few years at the beginning of your retirement can seriously affect the longevity of your savings.  Also, savings rates are in your control, while the market is not.  Let’s look at an example: a couple has a $100,000 combined income, and they’d like to retire in 10 years.  However, they’ve woefully underfunded their retirement savings account. They plan to invest 10% of their income; at an 8% return, that yields $166,000.  This could be an overly rosy assumption, because if the market only returned 4%, they’d have about $32,000 less for their retirement.  Instead of only saving 10%, let’s say they super-charge their savings and go for 20% for those ten years.  In that case, even with a 4% rate of return, they would have almost $270,000. That’s more than they had with twice that return on 10% savings.  And, if the economy is good and the return is 8%, they would have nearly $333,000 more for their retirement.  

It’s important to control what you can, and in this case, that means increasing your savings rates to provide yourself a more secure retirement.

It is also important to implement the HCM Safety Net™ as you enter the Fragile Decade to help mitigate the risk of bad markets devastating your retirement income potential.

Work Longer 

No one wants to delay their retirement, but it doesn’t have to be forever, and it does come with multiple benefits.  First of all, you can continue to contribute to your savings (recent changes from the Secure Act eliminated age limits for IRA contributions).  Second, you can take Social Security later, which increases your benefits dramatically by allowing you to earn delayed credits (see below).  Also, by delaying distributions, you’re allowing compounding of your assets to continue, giving you a bigger nest egg with which to retire. The impacts are impressive: a study found that working just 3-6 months longer had the same effect as an extra 1% of earnings over 30 years.  

There are other benefits to continuing to work: maintaining a routine, retaining social relationships with colleagues, keeping your skills sharp.  You don’t have to stay at work full-time. Going part-time or becoming a consultant can bring in increased revenue and allow you to forego larger distributions while earning delayed-retirement credits from Social Security.  

 Reduce Planned Expenses in Retirement

Your retirement nest egg may last longer if certain expenses, such as home costs during retirement years, are reduced. This is an easy step, as many retirees make plans to downsize after the children are gone. This can have multiple benefits.   Downsizing can result in a windfall of cash on hand, which you can use to supercharge your savings, as discussed above.  Also, it can reduce future expenses, as larger homes typically have higher utility bills and property taxes, as well as more things to maintain, resulting in higher maintenance costs.  

If you need to stretch your retirement dollars further, consider moving to a more affordable part of the country.  A 2018 survey found that the five best states for retirees were Florida, Colorado, South Dakota, Iowa, and Virginia after analyzing their overall cost of living, tax-friendliness, and the costs of senior-specific services, such as in-home or long-term care.  

Optimize Your Asset Allocation

As you near retirement, a portfolio that is too conservative can be just as risky as one that is too aggressive. This is because inflation can overtake a conservative portfolio’s ability to produce retirement income over time. At the same time, putting too much money into stocks can expose you to sequence risk, which can substantially decrease the longevity of your retirement portfolio. Retirement can be a 30- year prospect, long enough to consider an appropriate allocation to stocks, which – although they are more volatile – offer higher return potential over time. Your objective should be to build a portfolio around a sustainable withdrawal strategy that will meet your family’s needs. HCM has a great deal of experience helping clients with this process.

Finally, it’s crucial to lower your investment costs.  Investments such as annuities and mutual funds often have high fees, which can compound the same way wealth does.    Lower mutual fund and ETF expenses are associated with better returns, so you have strong motivation to maximize the efficiency of your investments.  HCM’s Investment Committee excels at this; please reach out to learn more.   

Delay Taking Social Security

One of the most common questions people ask us about Social Security is when they should start taking benefits. If you’re healthy and expect to live long, waiting until age 70 to receive Social Security benefits can result in a higher lifetime payout. As with most wealth management solutions, there’s no one-size-fits-all solution, so talk with us before committing to any strategy.  But, if you can delay taking Social Security, you are likely to realize substantial benefits.

Essentially, you’ll receive more per check.  If you can delay until you’re 67, you’ll receive 108% of the primary benefit you are entitled to at your normal retirement age; if you can hold out a few years longer, until 70, you’ll receive 132% of your primary benefit.  This may be difficult to achieve; you may have to work longer or draw down retirement resources sooner.  It’s ideal to work longer, as you realize the greatest compounding of assets in the last few years of accumulation.  

But, as this blog has emphasized, everyone’s situation is different.  Maybe it’ll make sense for you to take Social Security when it’s first available at 62.  If you need the money, are in poor health or have a family history of poor health, it could very well make sense to start taking Social Security early.  And, if you believe you can realize a greater than 7% return with the money, then taking the Social Security early and investing it may make more sense for you.  It can also serve as a hedge against possible political meddling with benefits from Washington; there is a “bird in the hand” element to cash, especially as you’re living in or approaching retirement.  


We’ve discussed a lot of possibilities for how to deal with a retirement shortfall.  In reality, there is rarely one silver bullet solution to your problem; a combination of several answers will most likely suit your needs optimally.  

If you would like to discuss some of these strategies in person, give one of our HCM Wealth Advisors a call and we’d be happy to set up an appointment to go over them with you in detail.

Content in this article is not intended to be financial advice. Instead, we think of it as educational and financial education is important to us.


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