Strategies to Prevent Your Retirement Funds From Falling Short: Nearly Half of Workers Over 60 Are Deficient - Learn Quick Ways to Catch Up
Improving Retirement Savings for Baby Boomers Without Defined Benefit Pensions
As many baby boomers approach retirement without defined benefit pensions, it's essential to take a proactive approach to securing a comfortable financial future. Here are some strategies that can help improve retirement savings.
Calculate and Target Adequate Savings
To ensure a retirement that lasts 30 years or more, aim for at least 25 times your projected annual retirement expenses, adjusted for inflation. For example, if you expect £50,000 yearly expenses, aim for £1.25 million in savings. This rule, known as the "4% Rule," suggests withdrawing 4% annually to make savings last.
Diversify Investments
Beyond traditional stocks and bonds, consider investing in Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITs), commodities such as gold (with a recommended 10-20% portfolio allocation due to its inflation-hedging properties), and a small allocation (5-10%) to volatile but diversifying assets like Bitcoin.
Maximize Social Security Benefits
Understand your full retirement age (FRA), consider claiming reduced benefits at age 62 if needed, or delay claiming until age 70 to increase monthly benefits. Spousal and survivor benefits strategies can also optimize lifetime income.
Reduce Retirement Spending or Adjust Lifestyle
Even a 10% reduction in planned retirement spending can significantly cut income shortfalls. Balancing spending cuts with maintaining quality of life is important.
Access Home Equity
Downsizing or relocating to lower-cost housing can free up capital. Alternatively, equity release (borrowing against your home’s value) can supplement income, though this comes with risks and should be considered carefully with financial advice.
Phase Transition Planning
Use the years before retirement to shift focus from accumulating assets to planning how to distribute them, managing risks like sequence-of-returns risk and income tax consequences.
By combining these strategies—thorough retirement needs calculation, diversified asset allocation, Social Security claiming optimization, spending adjustments, and home equity utilization—baby boomers without pensions can meaningfully improve their retirement readiness. Consulting with a certified financial planner is advisable to tailor these strategies to individual circumstances.
Additional Tips
- Ed Monk, associate director at Fidelity International, advises understanding what lifestyle savings can realistically support.
- Ms Yarwood suggests using online retirement calculators to determine a realistic spending goal.
- If you are expecting your pension to be insufficient, it's not too late to take action.
- Considering other sources of capital, such as Isas, investments, and bonds, can supplement retirement income.
- A five-step plan to save your retirement includes tracking old pension pots.
- Reviewing spending assumptions is crucial as the cost of retirement is rising and expectations are shifting.
- It is important to remember that retired people incur lower bills than workers, saving on the cost of commuting, lunches, and clothing, among other things.
Key Statistics
- There is £31.1 billion currently sitting in unclaimed or inactive pension pots.
- The individual or combined pension pot required for a moderate retirement is between £330,000 and £500,000, according to the Pension and Lifetime Saving Association.
- Approximately 49% of the still-employed generation aged 60 to 80 are not expected to reach their retirement goals.
- The annual cost of a moderate retirement for an individual, according to the Pension and Lifetime Saving Association, is £31,700, and for a couple, it is £43,900 (both figures are after tax and exclude housing costs).
- Defined benefit (DB) pensions, offering an income based on salary and years of service, are expected to meet retirement goals for 69% of baby boomers, while defined contribution (DC) pensions, based on individual and company contributions and investment returns, are expected to meet retirement goals for only 28% of baby boomers with DC pots.
- For baby boomers without defined benefit pensions, it's crucial to maximize savings and explore sources such as Individual Savings Accounts (Isas), investments, and bonds to supplement retirement income.
- To make savings last, aim for at least 25 times your projected annual retirement expenses, adjusted for inflation, and consider diversifying investments beyond traditional stocks and bonds, including Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITs), commodities, and volatile but diversifying assets like Bitcoin.
- When planning for retirement, personal-finance strategies like reducing retirement spending, accessing home equity, and optimizing Social Security benefits can help improve retirement readiness, but consulting with a certified financial planner is advisable to tailor these strategies to individual circumstances.
