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I feel hopeless. I am 60 years old and only have $15,000 saved. I will get a pension of 80% from the state of Massachusettsand be able to retire in three years. What can I do to increase my savings now?
– Joy
There's no question that $15,000 is a small amount of retirement savings for a 60-year-old, and I can understand why you'd be concerned about wanting to catch up. However, I would encourage you to reframe the problem you are facing. Instead of focusing on the fact that you have a low savings balance, think about your total retirement readiness as that is ultimately what it's all about. You may find that you are in a better position than you realise, or that there are better ways to close the gap than saving more.
Start by making sure you have a good understanding of how much income you'll need in retirement, and compare that to what you're currently earning. It is likely that you will need the same amount of income you currently have, but possibly even less.
One thing that stands out to me about your situation is that Massachusetts has a 5% income tax. However, condition pension benefits are not included, so straight out of the gate you'll save 5% of your income that you'd normally pay.
A pension that replaces 80% of your current income is significant and makes up for a significant amount of “lost” retirement savings. So, say you need 90% of your current income. If your pension replaces 80% then you are most of the way there. (If you need more help with your retirement income plan, consider match with a financial advisor today.)
A 60-year-old woman looks over her finances to decide whether she can retire in three years' time.
Saving more is certainly a good idea, but I'm not sure how much you can realistically do at this point. I don't know what your income is or what your expenses are. But, I know that the average person can only cut so much from their budget. Without knowing your situation, my suspicion is that there are better ways to close your retirement gap. (But if you want more help closing your retirement savings gap, this tool can help you find a financial adviser.)
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, move your home down or move to an area with a lower living costs can 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 do you have to? Every year you work is one more year of income and one less year of taking away from your savings. Also, if you leave at 63, you won't eligible for Medicare for two years, which could significantly increase your healthcare costs.
I'm not very familiar with the Massachusetts state pension system, but a quick glance suggests that your pension is based on either your highest three or five consecutive years of income. Will working longer increase that salary base for you? If so, you may want to consider the effect that working longer could have on your eventual pension income.
Note that since your pension is from Massachusetts, I made the assumption that you did not contribute to it Social Security. If you are, in fact, eligible for Social Security, then don't forget to include that as well.
A 60-year-old woman preparing for retirement reviews her finances, including her monthly expenses.
You can also consider retiring from your current employer, and if you are able to continue working even part-time, try to find a different job. That may seem like a bad idea, but it can be a smart financial move even if you're earning much less in your new job.
Here's why: If you are going to receive 80% of your income in the form of a pension, you will come out ahead if you find a different job and make more than 20% of what you currently earn.
For simplicity's sake, let's say you're currently making $100,000 a year. You retire and collect 80% of your salary annually – or $80,000 – from your pension. If you take a part-time job that makes $30,000, then your total income increases to $110,000. (A financial advisor It can help you game out scenarios like this. Consider speak to an adviser today.)
No doubt it would be great if you had more money set aside in retirement savings. You should also take reasonable steps to increase it, but there is no magic formula for leapfrogging. However, an 80% pension provides a solid income base for you to plan with.
Knowing that, it may be better to focus on other areas of your retirement plan. Limiting expenses, maximizing your pension and looking for even a small amount of supplementary income can offer better results than focusing on savings.
A financial advisor It can help you make strategic decisions leading up to retirement. Finding a financial advisor doesn't have to be difficult. SmartAsset's free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your match advisor to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, start now.
Social Security plays an important role in most Americans' retirement income plans. Deciding the best time to claim your benefits is crucial. SmartAsset is Social Security Calculator It can help you estimate how much your benefits will be based on when you plan to file for them.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuation such as the stock market. The trade-off is that the value of liquid money can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is SmartAsset's financial planning columnist and answers readers' questions on personal finance and tax topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon does not participate in the AMP SmartAsset platform, nor is he an employee of SmartAsset, and has been compensated for this article.Some questions submitted by readers are edited for clarity or brevity.
