13 last-ditch ways to avoid the poorhouse in retirement
10:26 AM, Apr 16, 2018
There’s a common anxiety dream that involves walking into a classroom to discover it’s the day of finals and you haven’t cracked a book all semester. Then there’s the waking dream a lot of Americans have — the one where you’re getting ready to retire but haven’t saved enough money to cover expenses if you stop working.
Just six in 10 workers report having saved anything — anything — for retirement, according to the Employee Benefit Research Institute, so a lot of people today may be losing sleep over their future finances.
Even those who are making a diligent effort to prepare for their golden years are falling short: Data from workplace plan administrator and fund giant Vanguard shows that just 18% of workers save the 10% or more of income that experts recommend squirreling away for retirement. More than a third are putting away less than 4%. (Unclear where your savings stand? A retirement calculator is a good place to start.)
Suspect you’re behind? Here are 13 ways later-in-life savers can address anemic retirement portfolios before it’s too late.
1. Move the goal post
Pushing back the due date for retirement may not be your ideal tactic, but it is one of the most effective. (The alternative is sticking to your original “retire by” date and then — let’s state this as delicately as possible — running out of money before your expiration date.)
The primary value of putting your plans on hold is that compound interest has some extra years to work its magic. Example: Give a $250,000 portfolio an additional three years to grow and that’ll get you about $48,000 in extra portfolio padding if it earns a 6% average annual return. Delay cracking the nest egg open for 10 years and that’s $198,000 more, bringing your total retirement portfolio value to nearly $450,000.
Every extra year you work and save is also one more year you won’t be drawing down your portfolio.
2. Go part time
Retirement needn’t be an all-or-nothing proposition. Easing your way out of the workforce by reducing your hours at your existing job may provide just enough of that much-needed leisure time without completely cutting off the paychecks.
Part-timers may also be able to retain some workplace benefits, like health coverage. Not having to cover costs like that means more of your savings stays and continues to grow in your investment account.
If part time isn’t an option at your current employer, look into working on a per-project or contractor basis. A bonus is that as a sole proprietor you can set up a SEP IRA or Solo 401(k), with which the contribution limits may be much higher than allowed in a regular IRA or employer-sponsored 401(k).
3. Play catch-up in your 401(k)
According to Vanguard research, the average worker contributing to a 401(k) plan saved 6.2% of their income in their employer’s plan in 2016. But late-in-life savers who are behind on their goals shouldn’t shoot for an average savings rate.
The IRS provides some tailwind to encourage workers age 50 or over by allowing them to make “catch-up contributions” in employer-sponsored retirement plans (like 401(k)s and 403(b)s). The whippersnappers the next cubicle are limited to $18,500 in annual contributions. But once you hit the big 5-0, you’re allowed to sock away an additional $6,000 a year for a total of $24,500.
Although that’s a lot of money to defer, it comes with a lot of tax breaks, too. Not only do contributions lower your taxable income for the year on a dollar-for-dollar basis, but as long as the money’s in the account, you owe nothing to Uncle Sam on the investment growth.
4. Catch up with an IRA, while you’re at it
The government’s saving incentives for older workers aren’t limited to workplace retirement accounts. The IRS also offers a catch-up contribution allowance on IRAs(individual retirement accounts). And if you’re not already saving in an IRA, that means you can put away an additional $6,500 a year once you’re 50 or older — and potentially with some additional tax benefits, if you qualify. (The annual limit for savers under 50 is $5,500.)
And yes, you can contribute to both an IRA and a 401(k) at the same time.
5. Grow your spouse’s tax-advantaged savings
IRS rules state that to be eligible to contribute to an IRA you must have earned income. But, as is the case with many things related to the tax code, there’s an exception to the rule: The spousal IRA.
If one person in the household works and the other does not (or if they earn a very low income), then an IRA can be opened in the nonworking spouse’s name based on all the same eligibility requirements that apply to the working spouse. (Note: You must file a joint tax return to be eligible.)
A spousal IRA is a way to double your and your sweetie’s retirement savings in a tax-advantaged account.
6. Do the side hustle
It’s mandatory for every article about quick savings strategies to include at least a passing mention of taking on side work to pump up your income. This is ours.
In practical terms, a side gig could be anything from working nights or weekends in the local knitting shop or coffeehouse to lining up a consulting gig in the industry in which you’ve built up expertise.
To ensure that the work is profitable, factor in any associated costs for things like certification requirements, insurance riders (if you run a business from your home, for example) or car maintenance and repairs (if you go the ride-sharing or delivery driver route).
7. Downsize the homestead
Many retirement planning experts recommend going into your golden years with no mortgage debt. That can be a tall order considering a mortgage is the largest debt most people have.
Instead of trying to pay off a big loan, consider downsizing the IOU by moving into a smaller, cheaper place while interest rates are still historically low. (It may simply be a matter of moving to a different neighborhood.)
Besides having to vacuum less floor, you’ll be able to stretch your money two ways:
Lowering your current expenses frees up more money to invest in an IRA and 401(k).
When you do retire, you’ll have lower housing expenses, which will make your nest egg go further.
8. Trim your cost of living
Pack up the moving van and slap on a “Mississippi or Bust” bumper sticker. According to the Council for Community & Economic Research’s 2017 cost of living data, Mississippi has the lowest cost of living of all U.S. states. Prefer a cooler climate? Then try Michigan (fourth on the list) or Missouri (sixth-cheapest place to call home).
Relocating is one of the more extreme retirement savings strategies. But it does help on two fronts: Cutting all these costs will help you save more dollars while you’re still working and stretch the ones you spend in retirement. But there’s no standard dollar value that can be applied to moving closer to — or farther from — the in-laws.
9. Welcome in a roommate
If the idea of lowering your living costs by selling your home seems too dramatic, how about finding someone to split your housing tab?
Taking in boarders will help cover today’s costs of living — mortgage and monthly utilities — to free up more money for you to invest for retirement.
Having a roommate doesn’t have to be a year-round commitment, either. If you live in an area that attracts tourists or seasonal travelers, you can rent by the day or week via Airbnb or VRBO.
Considering a longer-term way to bring in extra income? Set terms that make you comfortable and allow you to test-drive the concept. For example, advertise a short-term rental situation with the possibility of extending the lease.
10. Get someone else to pay your mortgage
Attention, homeowners: You’ve paid the bank for years to live in your home. If you’re short on cash in your senior years, maybe it’s time to turn the tables and have a lender pay you each month.
A reverse mortgage is a special type of loan — typically issued as a home equity conversion mortgage — that allows homeowners to tap the equity they’ve built up tax-free for as long as you or a qualified surviving spouse has the home as a primary residence.
To qualify for the FHA’s reverse mortgage program, the applicant must be 62 or older, own the house outright or have a sizable amount of equity and the financial means to continue to cover maintenance and property taxes.
11. Don’t overdo your emergency fund
One of the first rules of money management is to have an emergency fund in an easy-to-access savings account. But an emergency fund that’s too big can cost you a lot in earnings.
When you’re running out of years to get your money to multiply, it’s critical that every dollar you don’t need in the near term is working as hard as it can. To give those dollars the chance to earn as much as possible, they should be invested in the stock market.
Yes, the market is volatile over short periods. But over time stocks, as measured by the Standard & Poor’s 500 index, return an annual average of about 10%, and the market has gone up in about 70% of years.
If picking investments and building a portfolio on your own sounds like too much of a hassle, consider opening an IRA at a robo-advisor. For a relatively low management fee, these automated investing services will put together a diversified portfolio based on your risk tolerance and manage it.
12. Stop paying your adult kids’ bills
You can love your kids with all your heart, but that doesn’t mean you can afford to shower them with the contents of your wallet, too.
For those with inadequate retirement savings, every act of generosity matters, especially if supporting adult kids means sacrificing your own financial stability when you may not be able to work.
It may be a hard conversation to have with the kids, but explain that weaning them from the parental ATM is necessary so that you don’t become a financial drain on them later — unless they’re really looking forward to you moving into their home in the future.
13. Wait to cash in your Social Security chips
Uncle Sam allows people to apply for reduced Social Security retirement benefits as early as age 61 and 9 months, well before full retirement age. But the system rewards patience, and if you’re short on funds, it behooves you to sit on your application for a while.
When you postpone taking benefits beyond your full retirement age — which varies based on your year of birth — the Social Security Administration increases the amount you get as much as 8% annually until your 70th birthday, when the benefit stops increasing.
Getting an 8% raise during your working years is like striking gold. Having that opportunity for when you’re living on a fixed income is even sweeter. At SSA.gov there’s a simple benefits calculator to help estimate your future earnings.