Monday, April 15, 2013

Inadequate Retirement Account (IRA)

If you’re about to retire with a 7-figure retirement savings portfolio, you can find plenty of people to “help” with financial advice. In fact, they’ll find you.

With $30,000 saved, probably not so much.

There are two problems, really. There isn’t a lot of money to be made managing portfolios totaling 5-figures and, with such limited savings, there aren’t nearly as many options for you to improve your finances. If you don’t have much money, there’s only so much a financial adviser can do.

There are still a few levers to pull, though, if you find yourself approaching retirement without adequate savings and that’s my real goal for this blog, to help people who aren’t rich retire as comfortably as possible.

What constitutes “inadequate” retirement savings? Technically, it means that you won’t have enough savings when augmented with Social Security or other pension benefits to maintain your pre-retirement standard of living after you stop working.

The amount of savings you'll need varies a lot depending on your individual household’s situation, but we’re almost certainly talking about any household approaching retirement with less than $100,000 in retirement savings and probably those with less than $200,000. In some cases, though, a million and a half won’t do the trick.

The actions available to households with less than $200,000 or so in retirement savings — I’ve mentioned in several previous posts that more than 90% of American families approaching retirement have saved less than that amount — are primarily:
  • Working longer
  • Reducing living expenses
  • Investing conservatively
  • Postponing Social Security benefits as long as possible, and
  • Managing home equity.
If these are the four most important considerations for improving your retirement finances when you don’t have enough savings, the most important option to not consider is putting more of your wealth at risk in the stock market.

If your investment skills didn’t win the day for you during the greatest bull market in history over the last three decades, they aren’t going to pull your buns out of the fire in the last five years before you retire. 

Try to invest your way out of a savings shortfall and odds are you’ll only make your situation worse.

In my next post, I’ll talk about dealing with your shortfall by working longer.

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