What to do about a shortfall

A substantial proportion of households approaching retirement find that a realistic projection does not produce the retirement they expected. The available responses are few and they work.

The levers

There are only four, and every solution is a combination of them.

Save more. Effective in proportion to how many years remain.

Work longer. The most powerful available, because it operates on three variables simultaneously — more contributions, fewer years of withdrawals, and a higher Social Security benefit.

Analyses comparing these levers consistently find that a few additional working years does more than any plausible change in savings rate or investment returns for someone close to retirement.

Spend less in retirement. Which is the lever with the most immediate effect on the required portfolio.

Take more investment risk. The least reliable, and it increases the range of outcomes in both directions at exactly the point where a bad outcome is hardest to recover from.

Working longer, specifically

Worth examining because it is frequently dismissed.

Full-time work to seventy is not the only version. Part-time work, consulting or seasonal work in the first years of retirement produces much of the benefit, by reducing withdrawals during the period of highest sensitivity.

It also allows delaying Social Security, which permanently increases guaranteed inflation-adjusted income.

The caution: plans depending on working into the late sixties should have a fallback, since surveys consistently find that a substantial share of retirees left earlier than planned, most often through ill health, caring responsibilities or job loss.

Reducing fixed costs

The most durable form of spending reduction.

Housing is generally the largest item. Moving to a smaller property, a cheaper area, or from a house to something with lower running costs changes the required income permanently.

Clearing a mortgage before retirement has the same effect.

Vehicle costs, insurance and subscriptions are smaller and recur.

The advantage of fixed-cost reduction over discretionary reduction is that it does not require ongoing restraint. Once made, it persists.

Social Security decisions

For a household facing a shortfall, getting this right is disproportionately valuable.

Delaying the higher earner's benefit maximises both the payment and the eventual survivor benefit, which is the income floor for whichever spouse lives longer.

Where a shortfall exists, that floor matters more, not less.

Funding the delay by drawing more heavily on the portfolio in the interim is frequently the right trade, because it converts uncertain portfolio assets into certain lifetime income.

Housing wealth

For households whose main asset is the home.

Downsizing releases capital and reduces running costs, though transaction costs and the tendency to buy something nicer than planned reduce the net effect.

Renting out part of the property is an option in some circumstances.

Equity release products exist and carry substantial costs and complexity, and warrant independent advice.

The safety net

Worth knowing about rather than discovering later.

Programmes exist providing assistance with Medicare premiums and drug costs for those with limited income and assets, and take-up is well below eligibility.

Property tax relief for older residents is available in most states and requires an application.

Assistance with utilities, food and transport is administered locally, generally through area agencies on ageing.

These are entitlements rather than charity, and a substantial number of eligible people never claim them.

The timing point

The single most important thing about a shortfall is when it is identified.

At fifty-five, the available adjustments are modest and there is time for them to work.

At seventy, with the portfolio already depleted, the options are considerably harder.

Which means that running an honest projection — particularly when you suspect the answer will be uncomfortable — is the most valuable thing available.

The projection that is avoided is generally the one that most needed doing.

What not to do

Worth stating because a shortfall produces pressure toward specific errors.

Taking substantially more investment risk to make up ground, at exactly the point where a bad outcome cannot be recovered from.

Buying products promising high guaranteed returns, which attract people in precisely this situation.

Withdrawing from retirement accounts early, incurring tax and penalties.

Borrowing against the home for investment purposes.

Each of these converts a manageable shortfall into a worse one, and each is actively marketed to people who are worried.

General information only, not financial advice. Programme eligibility varies by state — consult a qualified adviser and your local area agency on ageing.