Retirees are not eligible for the pension income replacement factor

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A rule of thumb to maintain your standard of living in retirement is that you should be able to replace at least 70% of your working income.

But many retirees fall short of that retirement income goal, according to research from Goldman Sachs Asset Management. 1,566 US participants took part in the survey between July and August 2022.

Only 25% of retirees earn that amount, according to the firm’s research. At the same time, more than half of retirees – 51% – pay less than 50% of their pre-retirement income.

The gap isn’t surprising, given that more than 40% of those still working say they’re behind schedule on retirement savings. Members of Gen X — sandwiched between millennials and baby boomers — will say they’re holding off on retirement by more than 50%.

Competing life goals and financial priorities—the so-called financial vortex—can get in the way as savers balance other roles, such as parents or caregivers and homeowners or renters.

“You have all these competing priorities that can crowd out retirement savings,” said Mike Moran, senior pension strategist at Goldman Sachs.

If you’re still working, there are steps you can take to meaningfully increase your cash flow in later years and increase your chances of meeting that 70% income replacement rate.

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1. Reduce your lifestyle

By reducing your cost of living now, you’ll need less income in retirement. Ask yourself if you’re spending less than you’re making, suggested Sharon Carson, a retired strategist at JP Morgan Asset Management.

“If you’re not already doing it, this is the perfect place to start,” he said.

Ted Jenkin, CEO and founder of Oxygen Financial and a member of CNBC’s Financial Advisory Board, said he recommends a 21-day budget cleanse to help people reduce their spending.

Shop every account in your family to see if you can get a better deal for 21 days.

2. Drag your savings higher

Even if you’re on a tight budget, increase your retirement savings by 1% of your salary It can go a long way when you finally have to withdraw that money.

According to pension experts at JP Morgan Asset Management, you should generally set aside 15% of your salary for retirement. This may include company matching if you have one.

You may not reach 15% right away.

“See what you can do every year,” Carson said. “If you can do something, you have the long-term advantage of the merger.”

3. Find ways to save outside of business plans

If you don’t have access to a 401(k) or other retirement savings plan through your employer, you’re not alone. An estimated 57 million Americans do not have access to a workplace retirement savings plan.

You can still contribute to an individual retirement account with pre-tax money or after-tax money through a Roth IRA. Some restrictions apply. For example, if your spouse has a workplace plan and after-tax Roth contributions depend on your income, there are some limits on pre-tax contributions.

Many states are also stepping in to provide retirement savings programs to workers who don’t have access to employer plans.

4. Stay invested

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The No. 1 preferred source of retirement income for retirees surveyed by Goldman Sachs is investments, Moran said. You may want to consider dividend-paying stocks or municipal bonds to get more income out of your portfolio, he said.

The key is to stay invested and not put your money in and out of the market, Carson said.

True, the losses hurt. But trying to time the market can be a losing battle, especially since the market’s worst days are closely followed by its best days.

“If you try to time the market, you have to be right twice,” Carson said.

5. Delay claiming Social Security benefits

The longer you wait to receive your Social Security pension until age 70, the larger your monthly checks will be.

You can claim from age 62, but your benefits will be reduced.

At full retirement age—ages 66 to 67, depending on when you were born—you’ll receive the full benefits you’ve earned.

After that age, you’ll get an increase of up to 8% for every year you delay until age 70.

Even with a historically high 8.7% cost-of-living adjustment this year, it’s still smart to wait, experts say.

COLA increases the benefit that will be paid to you at your full retirement age, known as the basic insurance amount. The longer you delay claiming, the higher your benefits will be and the greater the impact annual cost of living adjustments may have.

6. Consider an annuity

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As pensions fall by the wayside, products called annuities have become a way to create an income stream in retirement. In retirement, you’ll have to sacrifice a lump sum up front in exchange for a steady stream of monthly checks.

A deferred annuity, which can provide income at a future date, can help if you’re worried about running out of money later, Moran said.

Jenkin noted that some immediate or variable annuities offer attractive guarantees, which can provide checks more quickly.

Since these agreements are binding, it helps to proceed with caution.

Make sure the fees and costs aren’t out of the question, Jenkin said, and don’t buy a product someone is pushing at a lunch seminar.

“The best advice is to hire someone for an hourly rate to shop the product for you,” she says. “Don’t pay anyone a fee or commission to sell it.”

7. Plan to work a little longer

According to research by Goldman Sachs, the second most preferred source of retirement income is part-time work.

It has many benefits. Your income may not disappear completely when you retire. Plus, you can still get the social benefit of interacting with your coworkers, according to Moran.

The extra income you earn can help delay Social Security benefits or take less money out of your retirement portfolio, helping your money last longer for years to come.

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