As retirement planning necessarily incorporates a number of variables, it can be hard to nail with exact precision. Two of the biggest of these, your life expectancy and your investment return, can at best be “guesstimated,” meaning you’ll want to leave plenty of room for error.
However, there are plenty of steps you can take that have more certainty and can help ensure that a retirement crisis doesn’t happen to you. Here are the most important.
Save as Much, and as Early, as Possible
When it comes right down to it, the best way to avoid a retirement crisis is to build as big of a nest egg as you can. While not all of the factors are within your control, one of them most decidedly is — and that is to save as much as you can as early as you can.
The simple reason behind this is that compound interest works best over longer periods of time. If you start saving $200 per month at age 20, for example, you could end up accumulating nearly twice as much by age 65 as if you started at age 45, even if you were putting in $1,000 per month at that age.
Starting early, and saving as much as you can, is the best way to build a large nest egg and protect yourself from a future retirement crisis.
Avoid Investing Too Conservatively
It’s a common fallacy that once you retire you should switch all of your investments to Treasury bills and other conservative investments. While it’s true that you shouldn’t put your entire nest egg into Bitcoin and other speculative pursuits, it’s also true that you may be retired for 30 years, or even more.
Over time periods that long, your portfolio can survive a few downdrafts, with plenty of time to recover. You’ll also need growth investments to help counter the effects of inflation over that time. Picking the proper balance of risk and reward, however, is a delicate proposition. You’ll have to explicitly determine your investment objectives and risk tolerance and discuss your situation with a financial advisor.
Have a Social Security Claiming Strategy
Social Security isn’t intended to fund your entire retirement, but it’s still an important component of your nest egg. The average benefit for all retired workers in 2023 is $1,827, which still amounts to $21,924. That’s a significant boost to most retirees’ income for the year, and it can help stretch your total nest egg a long way.
However, the actual amount you will receive from Social Security depends on both your working income and the age at which you file for benefits. As the Social Security Administration uses your top 35 earning years to compute your benefit, you’ll want to make sure you work at least that long and don’t take any zeroes in that calculation.
You’ll also want to determine whether you should take your benefits at 62, 70 or at some other age in between. Taking your benefits early will provide you with more checks but lock in a reduced monthly payment. Conversely, waiting until age 70 will increase your checks by 24% over drawing at full retirement age of 67, but you’ll have to wait additional time. Which option is best for you will depend on a number of factors, from your personal financial situation to your current health and anticipated lifespan.
Consider Lifelong Income
Buying an annuity isn’t for everyone, and you should talk with your financial advisor if you’re considering one. But one of the major advantages that an annuity can offer is a guaranteed, lifelong income stream. If you’re concerned about outliving your money, you can ease that fear by choosing an annuity that will pay income for as long as you live. But be sure to talk to an expert before you invest so you understand the pros and cons of annuities.
Anticipate Changes and Surprises
One of the best ways to avoid a retirement crisis is to prepare for the unexpected. Although you can’t always know exactly what retirement will bring, being prepared for as much as possible is a prudent approach.
For example, it’s entirely possible that you will be forced into early retirement, whether due to illness or company restructuring. The faster you can build up your nest egg, the more you will be prepared for this type of circumstance.
You also should plan ahead for a changing budget after retirement, especially one that includes higher healthcare expenses. Depending on your lifestyle, you also might plan ahead for higher travel expenses, or an extra budget for gifting and charity.
