Once you’re a decade or so from retirement, it’s time to take a hard look at how ready you’ll be. Sure, you may be making progress toward your savings goal. But does that goal actually match your retirement spending needs?
Perhaps you’re aiming to put away 12 times your pay by the time you retire—that oft-cited rule of thumb is how much a married couple making $100,000 would need to replace 80% to 85% of their pre-retirement income.
But what if you’ve come up in the world since you set your target? For higher earners, Social Security will make up a smaller percentage of your income. So assuming no big cut to their standard of living, a couple earning $200,000 would need to save 16 times their pay, says Wharton finance professor Richard Marston, author of the new book Investing for a Lifetime. Given that, he says, “many pre-retirees are realizing they’re not as ready for retirement as they thought.”
In fact, some 40% of baby boomers are at risk of running out of money in retirement, a recent study by the Employee Benefit Research Institute found.
You still have time to step up your savings. Housing is your top cost at this age, so downsizing can be a potent money saver. But you may not want to move. Try these strategies instead to free up cash.
Don’t squander an empty nest. After you’ve spent huge sums on your kids’ college bills, you may be tempted to go wild once they graduate. A study by the Boston College Center for Retirement Research found that many families do just that—increasing spending by 51% on average once children leave home. Okay, treat yourself, but also divert some of that windfall toward retirement. “You can save an awful lot that way,” says Marston, who used this strategy when his last child left college. Life insurance is another potential source of savings—with your kids grown, you may be able to drop or reduce the coverage.
Favor low-cost pleasures. Happiness doesn’t require as much spending as you might think, a recent Journal of Consumer Research study found. Dartmouth researcher Amit Bhattacharjee and Wharton’s Cassie Mogilner asked people ages 18 to 79 how much happiness they derived from both ordinary and extraordinary experiences. Younger people most enjoyed extraordinary experiences, such as big trips abroad. But older adults found just as much happiness in everyday ones. So for now book dinners with family and friends, hit a museum, plan a vacation to a national park—and pocket the savings.
Spend less to invest. If you own actively managed stock funds, you may be paying fees of 0.8% or more, reports Morningstar. Yet studies show that these funds rarely outperform over the long term. Shift into lower-cost index funds or ETFs, says Jim MacKay, a financial planner in Springfield, Mo. Lowering fees from 0.8% to 0.2% on a $750,000 IRA could free up $4,500 a year. In this home stretch, every little bit counts.