You haven’t saved enough for retirement. Now what?

Due in part to the financial crisis in 2008 and COVID-related market dips, many baby boomers are approaching retirement with smaller nest eggs than they’d like. If you find yourself behind on savings and short on years before retirement, don’t give up hope. It may take some work and a bit of sacrifice, but there are steps you can take to improve your situation and still enjoy your golden years.

How much is “enough”?

The answer depends on whom you ask, but many financial professionals advise clients that they’ll need around 80% of their peak income to maintain their standard of living in retirement. For example, if your maximum pre-retirement salary was $100,000, you may need upwards of $80,000 per year to keep your current lifestyle.

But annual expenditure is only half the equation. To calculate your target amount, you’ll need to multiply 80% of your income by the number of years you expect to live. If you retire in good health at 65 and want to plan through age 90, you’d multiply 80% of your peak income by 25 years. In the example above, that would mean a total of $2 million throughout your retirement.

Wait, $2,000,000?!

If seeing that figure caused your heart to skip a beat, you’re not alone. In a 2020 AgeUp survey of nearly 1,400 people between the ages of 50 and 75, about half the respondents had less than $50,000 saved, and almost three-quarters had less than $250,000. If that’s the case for you, don’t panic.

You may need up to 80% of your prior income to maintain your standard of living, but living more frugally could be an option. You may not have the retirement of your dreams, but it doesn’t mean all is lost. The 80% figure is also on the high end – some advisors tell their clients to aim for around 70% of their peak income.

Secondly, the $2 million in the example above doesn’t need to come exclusively from your savings. Retirement income can come from a mix of sources, including Social Security benefits, any annuities or pensions you may have, part-time work, or investments like rental property.

Social Security shouldn’t be Plan A

Social Security is vitally important for senior Americans, but the program was never intended to be a retiree’s sole means of support. Social Security will only replace about 40% of pre-retirement income for average earners, and that figure drops to around 27% for high earners. The more you made during your career, the smaller the percentage Social Security will replace.

The average 65- to 74-year-old household spent $4,640 a month in 2019, but the average Social Security benefit was just $1,461 per month. Even if both members of a retired couple receive the average monthly benefit, that’s still less than $3,000 a month combined.

There’s also some cause for concern about Social Security’s future. The Social Security Trust’s reserves are projected to be depleted by 2034, according to the program’s board of trustees. After that, payroll taxes will only cover 76% of current retirement and survivor’s benefits in its current form.

So what now?

Here are some options for getting your retirement on track if you’re not currently where you want to be. Everyone’s situation is different, so they may not all apply to you. If possible, you should talk to a financial professional to decide on the best course of action.

Max out your contributions (if possible)

If you’re behind in your retirement savings, the first step is to start playing catch-up as soon as you can. The pre-tax contribution limit for 401(k) plans in 2020 is $19,500 per year, but employees 50 and older can add an additional catch-up contribution of $6,500 per year to workplace retirement plans.

You can also contribute $6,000 per year to an Individual Retirement Account (IRA), plus an additional $1,000 catch-up contribution for those 50 and over. That means you can save up to $33,000 per year in tax-advantaged retirement accounts in total in 2020. Of course, putting over $30,000 a year into a retirement fund isn’t realistic for many Americans. You have to work with what you’ve got, so save what you can.

Prioritize your retirement

Many parents feel an obligation to pay for their children’s education, but there often just isn’t enough money to simultaneously save for college and retirement. Which of the two you should prioritize is a personal decision. Still, there’s a reason for the adage “you can take loans out for school, but you can’t borrow for retirement.”

You may not want your children saddled with onerous student loan debt, but they have a full career’s worth of earnings ahead of them. If the well runs dry too soon on your retirement savings, your kids may end up needing to provide for you earlier than expected.

Hang in there for a few extra years

Delaying your retirement can make a massive difference in your financial well-being. You’ll have a few more years to build up your nest egg obviously, but there are other benefits as well. Waiting to retire means you’ll need to draw on your savings for a shorter period of time, so you’ll need less in total. Third, your savings and investments will also have more time to grow. And because compounding works on an exponential curve, the greatest benefits come at the tail end of asset accumulation.

Delaying your retirement could also allow you to defer your Social Security benefits. If you’re eligible for Social Security, you can choose to receive reduced early retirement benefits at age 62, full benefits at your normal retirement age (between 65 and 67, depending on when you were born), or increased benefits as late as 70. The longer you defer, the larger your monthly benefit will be.

To give an example, let’s say your full retirement age is 66, which is true for anyone born between 1943 and 1954. For every year you defer, your monthly benefit will increase by around 8%. If your full retirement benefit would’ve been $1,500 per month at age 66, waiting until 70 could increase your Social Security retirement benefits to almost $2,000 per month. (There’s no increased benefit for deferring beyond age 70.) You can see the rate of increase and deferral chart for your birth year here.

That’s not to say everyone should defer their Social Security. Waiting until 70 means missing out on several years of payments, which not everyone can afford. It also matters how long you live. The longer your life expectancy, the greater the reward. If your health is poor or you don’t expect to live a long time after retiring, deferral might not be the right option. And finally, like we mentioned earlier, relying on the future solvency of Social Security could be a risky move. You should talk to a financial professional or the Social Security Administration about your situation before making any decisions.

Move somewhere more affordable

First the bad news. According to a 2019 report from UMass Boston’s Center for Social and Demographic Research on Aging, nowhere in the U.S. is the cost of living low enough for retirees to make ends meet on Social Security alone. That’s true even for seniors without rent or a mortgage to pay. In the most expensive areas, like San Francisco County, California, the gap between Social Security and seniors’ basic income needs is more than $27,000 a year.

Thankfully, there are some areas where your Social Security dollars will go much further, according to the researchers. For seniors in Wyoming County, West Virginia, Social Security retirement benefits actually come within $2,000 per year of meeting basic needs. That’s close enough for a part-time job or small pension to make up the difference. We’re not suggesting everyone should move to Wyoming County, but location is a huge factor in making retirement ends meet.

Or somewhere much more affordable…

If you want to stretch your Social Security dollars as far as humanly possible, the “destination retirement” might be an option. Unlike Medicare, American citizens are entitled to Social Security retirement benefits whether they live in the United States or abroad. (With caveats, as there are some countries where payments can’t be sent.)

Around 1.5 million American expats currently reside in Mexico, where the monthly cost of living is typically much cheaper than north of the border. For those from the West Coast, Mexico has the added benefit of being close to home and grandkids (although the cost of frequent international travel may defeat the purpose). If you’re willing to venture a bit farther, other popular retirement destinations include Costa Rica, Panama, Ecuador, Portugal, and Malaysia.

Join the gig economy

The rise of the gig economy means retirement income options don’t begin and end with welcoming customers to big box stores. Gig economy jobs also typically come with more autonomy and more flexible schedules than traditional employment. That can be great if you need to earn extra income, but still want to spend your retirement on your own terms.

Driving a rideshare is the most well-known option, but if you dig a little deeper, there’s something for almost everyone. For animal lovers, there’s dog walking and pet sitting. If you’re proficient in an instrument or foreign language, there are sites to help you find students for private lessons and tutoring. Sites like TaskRabbit can help connect you with people who need help with errands, repairs, or services like tax preparation. Into crafts? You could open a shop on Etsy. Love kids? Several sites will match clients with nannies and babysitters. If you have a skill, there’s a good chance you can use it to earn some extra retirement income.

Do a benefits checkup

For those who’ve already retired and are in a tight financial spot, you may be eligible for benefits beyond just Social Security and Medicare. The Social Security Administration administers a separate program called Supplemental Security Income, which helps provide income to meet basic needs for eligible Americans.

There are also numerous state and federal programs designed to help seniors make ends meet, including help with cell phones, food, transportation, and more. If you need help, the National Council on Aging hosts a website that lets seniors discover programs they may be eligible for, which you can find at benefitscheckup.org.

Think about a longevity annuity

If you have moderate savings, but are worried what will happen if you live to an advanced age, a longevity annuity may be an option. In exchange for money today, longevity annuities provide an ongoing stream of income later in life. (You can think of them as something like a delayed pension or Social Security.)

In our 2020 survey of nearly 1,400 Americans ages 50-75, almost two-thirds of respondents said they worry about running out of money in their later years. Longevity annuities can help alleviate that concern. If you don’t know how many years you’ll live, it’s hard to know how much of your savings you can afford to spend per year. By guaranteeing a base level of future income, longevity annuities can help you breathe a little easier early in your retirement.

Most longevity annuities are purchased with a one-time payment of at least $10,000, and begin paying out no later than age 85. AgeUp, on the other hand, was designed to help people who may not have the savings for a large lump sum payment. Instead of thousands of dollars up front, AgeUp can be purchased in monthly installments of as little as $25. AgeUp payouts also start later than most longevity annuities, with payouts beginning at 91 or later. This longer deferral period allows for larger monthly payouts, dollar for dollar.