David Lerner Associates: How to Resolve Retirement Income Shortfalls
Most people still regard the American Dream as attainable - work hard, provide well and retire in comfort. Unfortunately, this is not always the case. Without prudent planning, and a commitment to saving now to make that happen, millions of older Americans find themselves with an income shortfall.
That old saying “Prevention is the best cure” can apply to an income shortfall. Dealing with a retirement income shortfall is best done long before it’s time to retire. Retirement income needs must be based on the type of lifestyle envisioned and the timing of retirement. If reality is not in sync with the projections, and it looks like the retirement income will be insufficient, this is called a projected income shortfall.
Resolving Projected Retirement Income Shortfalls
Finding the best solution will depend on several factors:
- The severity of the projected shortfall
- The length of time remaining before retirement
- How long the retirement income needs to last
There are several methods of coping with a projected income shortfall:
- Delay Retirement
One way of dealing with a projected income shortfall is to stay in the workforce longer than planned. This can delay taking Social Security benefits or distributions from retirement accounts. The longer tapping into these sources is delayed, the longer the money will last.
Effect on Social Security
The Social Security Administration has set a "normal retirement age" which varies between 65 and 67, depending on your date of birth. If you elect to delay retirement you can increase your annual Social Security benefits. There are two reasons for this. First, each additional year that you work adds an additional year of earnings to your Social Security record, resulting in potentially higher retirement benefits. Second, the Social Security Administration gives you a credit for each month you delay retirement, up to age 70.
Effect on Retirement Plan Distributions
The longer retirement is delayed, the longer contributions to an IRA or employer-sponsored retirement plan can be made. The rules for a traditional IRA state that contribution must stop and the minimum distributions must begin at age 70½. If this does not occur there will be a 50 percent penalty on the amount that should have been distributed.
With a Roth IRA, this does not apply. There is no need to take any distributions during the contributor’s lifetime and one can continue to make contributions after age 70½, as long as the contributor is still employed.
Save More Money
One of the best ways to deal with projected retirement income shortfalls is by adjusting current spending habits. Saving even a little money can really add up if it’s done consistently and earns a reasonable rate of return. Use the money saved to boost your retirement savings. Depending on how many years there are until retirement, It may be possible to make only minor changes. If retirement is fast approaching, drastic changes may be needed..
Re-evaluate Retirement Lifestyle
If the projected income shortfall is severe enough, or if time is too tight, It may not be possible to live that dream of a luxurious retirement. Accepting a more realistic standard of living may be the answer. Here are a few suggestions:
- Reduce your housing expectations. If you are facing a severe income shortfall, shop around for a more affordable housing option in a less exclusive location.
- Cut down on travel plans. Instead of an extensive travel schedule cut back to road trips in the US. Stay with friends and relatives. Simple trips can be just as much fun as extravagant vacations and they don't put as big a dent in the retirement fund.
- Consider a less expensive automobile. Purchase a used car of the type you want. Or buy a reliable new car five years before retirement, take excellent care of it and have it all paid for by the time retirement comes around.
- Lower household expenses. There are numerous ways to decrease your everyday expenses: eat out less often, use public transportation instead of your car, or set your home thermostats slightly lower in the winter.
Retirement may seem a long way off, but it will be around the corner much sooner than one anticipates. Balance the pleasure of indulging now with the joy of having sufficient income when it’s time to retire.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.
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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: http://www.davidlerner.com
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