4 Ways to Handle a Retirement Savings Shortfall

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Whatever the reason, you find yourself within a few years of when you plan to retire, but your savings is only a fraction of what you'd planned for. What can you do? Here are your options:

Squeeze more return from your portfolio: It may seem like the right move to dramatically increase your market exposure to try to make back what you've lost.

This is a very risky proposition. If the market happens to increase significantly, you're golden. If it stays flat or drops, you're in an even worse position. This sort of manipulation of portfolio holdings is never a wise move -- you're always better off with a well-diversified portfolio designed to provide long-term results. Short-term thinking of this nature may even be the reason you're in this position in the first place. Statistically, the average "little guy" investor has a very low chance of outperforming the market; even the pros fail to beat the benchmarks more than half the time.

Cut your expenses today, freeing up more cash to shore up savings: One of the most important ways to improve your savings balance is to add more deposits. (Makes sense, right?) This on its own won't necessarily have a dramatic impact on the bottom line (unless you're willing to really make some cuts). But it will have a twofold effect, since you'll be increasing the amount you have set aside while getting accustomed to spending less, a habit that will serve you well in the future (see the next point for more).

Maybe you could play the public course for a while (rather than the country club). Or instead of buying your grandkids that video game system, treat them to a minor league ballgame or a trip to the zoo (they'll remember it much longer, believe me). Or maybe it's time to downsize your home, cutting a major expense category.

Review and reduce your planned expenses in retirement -- If you can work it out so you need less money every year, naturally you won't need to have as large of a nest egg to get you through the 30 or more years of your retirement. If you "practiced" this by reducing your expenses before retirement, you can have a significant impact on the expenses and savings you will need during retirement.

Work longer: Although it may not be an attractive alternative, working a few years longer before retiring will have the dual impact of giving you more time to add funds to your retirement accounts while reducing the number of years you'll be pulling money from them.

Annuitize a portion of your savings: It's not an intuitive response to the situation, but it might provide the breathing room you need. It is possible to buy a low-cost immediate annuity that provides guaranteed income to you (possibly with inflation protection) over your lifetime.

Details on annuities can be very complicated, but the gist is that you are using a portion of your funds to buy a lifetime income stream -- and the income stream is often a bit higher than you could realistically expect to withdraw from a nonannuity portfolio of similar dollar amounts. This increased withdrawal rate is due in part to a significant downside of immediate annuities -- at your death the money is gone, with nothing going to your heirs.

Jim Blankenship, CFP, EA, principal of Blankenship Financial Planning, based in New Berlin, Ill., is a NAPFA-Registered financial adviser. He writes frequently on retirement plans, Social Security and tax matters at his blog Getting Your Financial Ducks In A Row.

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