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I feel desperate. I’m 60 years old and I only have $15,000 saved. I will receive an 80% pension from the state of Massachusetts.and be able to retire in three years. What can I do to increase my savings now?
– Happiness
There’s no doubt that $15,000 is a small amount of retirement savings for a 60-year-old, and I can understand why you might be concerned about playing catch-up. However, I encourage you to rethink the problem you are facing. Instead of focusing on the fact that you have a low savings balance, think about your overall preparation for retirement, since that’s ultimately what it’s all about. You may find that you’re in a better position than you think or that there are better ways to close the gap than saving more.
Want help assessing your retirement readiness and income? Talk to a financial advisor about it today.
Start by making sure you have a good understanding of how much income you will need in retirement and compare it to what you currently earn. You will probably find that you need, at most, the same amount of income as you have now, but possibly even less.
One thing that stands out to me about your situation is that Massachusetts has a 5% income tax. However, state pension benefits are excluded, so from the start you will save the 5% of your income that you would normally pay.
A pension that replaces 80% of your current income is substantial and fully compensates for a considerable portion of your “missing” retirement savings. So let’s say you need 90% of your current income. If your pension replaces 80%, then you’ve already come most of the way. (If you need more help with your retirement income plan, consider contacting a financial advisor today.)
A 60-year-old woman reviews her finances to determine if she will be able to retire in three years.
Saving more is certainly a good idea, but I’m not sure how much you can realistically recoup right now. I don’t know what your income is or what your expenses are. But I know there’s only so much the average person can cut from their budget. Without knowing your situation, I suspect there are better ways to close the retirement gap. (But if you want more help closing your retirement savings gap, this tool can help you find a financial advisor.)
So what are they? Some of the ideas that come to mind include:
Look for realistic ways to permanently reduce your expenses that you can live with. If possible, downsizing your home or moving to an area with a lower cost of living can potentially put a significant amount of money back into your budget. Not only will this free up room to save more, but it will also directly reduce the amount of income you need in retirement.
You say you are eligible to retire in three years, but is it necessary? Every year you work is one more year of income and one less year of withdrawing your savings. Additionally, if you retire at age 63, you will be ineligible for Medicare for two years, which can significantly increase your healthcare costs.
I’m not very familiar with the Massachusetts state pension system, but a quick look suggests that your pension is based on your three to five consecutive years of highest earnings. Will working longer increase that salary base for you? If so, you may want to consider the impact working longer could have on your eventual pension income.
Note that since your pension comes from Massachusetts, I assumed you didn’t contribute to Social Security. If you are, in fact, eligible for Social Security, don’t forget to include that as well.
A 60-year-old woman preparing for retirement reviews her finances, including her monthly expenses.
You may also consider leaving your current employer and, if you can continue working even part-time, try finding a different job. It may seem like a bad idea, but it can be a smart financial move even if you earn much less at your new job.
Here’s why: If you’re going to receive 80% of your income as a pension, you’ll be better off if you find a different job and earn more than 20% of what you currently earn.
For the sake of simplicity, let’s say you currently make $100,000 per year. You retire and collect 80% of your salary (or $80,000) from your pension annually. If you take a part-time job and earn $30,000, then your total income actually increases to $110,000. (A financial advisor can help you resolve scenarios like this. Consider speaking with an advisor today.)
There’s no doubt that it would be great if you had more money saved for retirement. You should also take reasonable steps to increase it, but there is no magic formula to move forward. However, an 80% pension provides a solid income base to plan for.
Know that it may be better to focus on other areas of your retirement plan. Limiting expenses, maximizing your pension and seeking even a small amount of supplementary income can offer better results than focusing on savings.
A financial advisor can help you make strategic decisions prior to retirement. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can take a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Social Security plays an important role in the retirement income plans of most Americans. Determining the optimal time to claim your benefits is essential. SmartAsset’s Social Security calculator can help you estimate how much your benefits will be based on when you plan to apply.
Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of significant fluctuations like the stock market. The downside is that inflation can erode the value of liquid cash. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about tax and personal finance topics. Do you have any questions you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform nor is he an employee of SmartAsset, and has received compensation for this article.Some questions submitted by readers are edited for clarity or brevity.
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