I sometimes receive emails from investors describing themselves as “behind schedule” with regard to retirement savings. They’re nearing the age at which they’d like to retire, but their portfolios just aren’t where they’d need to be to get the job done.
The truth is, if you’re in such a situation, there are things you can do to improve your chances of retiring comfortably, but they’re not magic bullets — they involve sacrifices and have imperfect success rates. Nor are they top secret tips — these are the same types of things we discuss here on the blog all the time.
Whether it’s sticking it out for an extra couple years at your current job or picking up part-time work in a more enjoyable field after leaving your job, retiring later is often the highest-impact thing you can do for your retirement finances. Each additional year of work is one more year to accumulate savings and one fewer year of spending from your savings.
Improve the Return from Your Investments
Many investors who find themselves behind schedule with their savings attempt to make up for lost time by ratcheting their stock allocation upward. Sometimes it works. Other times it backfires.
Rather than crossing your fingers and taking on more risk, my best suggestion for improving returns is to cut costs. While even this is not a sure thing, low-cost index funds (or ETFs) tend to outperform the majority of actively managed funds, and I have yet to hear of anyone finding a better predictor of mutual fund performance (within a given asset class) than fund expense ratios.
Annuitize Part of Your Portfolio (by Delaying Social Security)
Finally, the safest way to increase the amount you can spend from your portfolio per year is to annuitize a part of that portfolio via an immediate inflation-adjusted lifetime annuity. In exchange for giving up liquidity and the ability to leave the money to your heirs when you die, such annuities offer a higher level of income than you can safely take from a typical stock/bond portfolio.
Remember though, that delaying Social Security is akin to buying just such an annuity — one that’s a significantly better deal than what you could actually buy from an insurance company. So before using a part of your portfolio to purchase an actual annuity, it usually makes sense to use that part of your portfolio to satisfy your regular spending needs while you delay claiming Social Security benefits for as long as possible.