Imagine for a moment you're ill-prepared for
retirement and don’t know what specific actions could change that situation.
Stephen Wendel, head of behavioral science at Morningstar,
an investment research company, recently laid out eight changes that could help
retirement savers do a better job of building a nest egg.
According to a paper by Wendel, the actions fall into three
- Financial planning (adjusting one’s standard of
living in retirement, delaying retirement and increasing contribution
- Investing (increasing net returns from
investing, using a more aggressive asset allocation).
- Investor behavior (signing up for increased
contributions over time and choosing whether to invest one’s savings at
And here's some good news: Austerity isn’t necessary
to reach your retirement goals, according to the report, "Easing
the Retirement Crisis: How financial planning and personalized advice can head
off extreme austerity."
Instead, Wendel found that combining multiple, less-extreme
changes – delaying retirement, contributing more to your 401(k)
plan and lowering one’s expectations for retirement – can be
tremendously effective at improving retirement readiness.
“If Americans delayed retirement until at least age 67 and
contributed at least 6 percent (to their retirement accounts) ... that
would boost the percent of American households having what they need from 25.6
percent to 71.2 percent," Wendel wrote in the report.
But Wendel found that a one-size-fits-all approach to achieving
retirement goals doesn’t work. “For example, delaying retirement can be very
impactful for one individual but not particularly effective for another,”
he wrote. What’s more, he wrote that “personalized advice is essential to help
What do financial advisers say about the research?
your standard of living
Adjusting your standard of living is difficult for anyone
to do, but a good place to start is by examining your budget, says Matthew
Gaffey, a senior wealth manager with Corbett Road Wealth Management. “Take the
time to truly detail each of your expenses for a few months, and you will most
likely find that there is some ‘low hanging fruit’ that you can eliminate,” he
For example, what memberships/clubs do you have/belong to
that you are not using – the gym, magazine subscriptions, premium cable
channels and the like?
Delaying retirement doesn’t come with the same stigma that
it used to. In fact, many people retire only to go back to work, Gaffey
says. And it’s not because they need the money; it’s because the idea of
sitting on a rocking chair “getting old” doesn’t appeal to them, he says.
Increasing contribution rates to your 401(k) or retirement
accounts can be a tough pill to swallow when you do it all at once. “Instead,
focus on increasing your contribution rate by 1 percent of your income
every year,” Gaffey says.
If you invest your own money and want to get a better
return in the market, start by truly examining the person you see in the
mirror, Gaffey says. How do you evaluate and select investments? Note,
Gaffey says, that the average investor consistently lags the benchmark,
regardless of whether it is in stocks or bonds. “If you do a true self-assessment
of your management of your portfolio and admittedly lack the skill, the
will or the time to manage your portfolio, it probably makes sense to
speak with a professional,” he says.
all about baby steps
Many of the actions that you can take to better prepare for
retirement begin with baby steps, Gaffey says. “You don’t go from being out of
shape to running a marathon overnight,” he says.
While it is not the case with everyone, achieving financial
security or preparing for retirement is like many other things in life that
require discipline, Gaffey says.
“For example, I know that if I want to be healthy and/or
lose weight, I have a much higher likelihood of accomplishing that if there are
certain actions I take and/or decisions I make,” he says. “If I am
serious about losing weight, I should put together a plan on how to attack the
problem, exercise regularly, change my diet to incorporate better food and
smaller portion sizes and make generally better decisions surrounding my
That doesn’t mean, Gaffey says, that you can’t have the
occasional glass of wine or piece of cake, but those really need to be more of
the exception than the rule.
One risk that you’ll face in retirement is something called
longevity, the risk of outliving your money. And one way to manage that risk is
by purchasing a type of annuity called ALDA, or longevity insurance.
ALDA "is more of an insurance against a person's
longevity,” says Kerry Uffman, founder of TWRU Private Wealth Management,
in Baton Rouge, Louisiana. “Typically, people who purchase an ALDA are older,
say ages 50 to 60, and use 10 to 30 percent of their retirement savings to
The ALDA would start paying the owner a stream of income
for life, starting at age 80 or 85, for instance.
According to Uffman, buying an ALDA allows retirees to
split their wealth into two time horizons: before age 85 and after.
mortgage with line of credit at age 62
Having a reverse mortgage with a line of credit provides
homeowners with money they can tap into later in life. What’s more, Uffman
says, the line of credit grows at a rate higher than that of a conservative
A reverse mortgage loan allows homeowners to borrow money
using their home as security for the loan, just like a traditional mortgage,
according to the Consumer Financial Protection Bureau. Unlike a traditional
mortgage, though, borrowers don’t make monthly mortgage payments.
here for the original article from USA Today.