Am I Too Late? I’m 65 and Only Have $120k Saved for Retirement

A low-savings retirement is one in which you don’t have enough money in your portfolio to generate a comfortable retirement income. For example, let’s say that you’re 65 and have $120,000 in a retirement portfolio. We’ll assume that this money is in a pre-tax 401(k). This won’t generate a livable income on its own. That doesn’t mean it’s too late to make plans, though, or that you can’t live a secure and comfortable life. But it will take some thought, sacrifice and planning.

As you approach retirement, no matter what your situation, the first thing to do is take stock of your income and assets. What will generate income for you? What level of earnings are reliable? What assets can you convert to cash? What benefits, pensions or other payments will you receive? Are you eligible for Social Security benefits?

For example, say that you own your own home. In this case, a sale or a reverse mortgage can often generate a significant cash boost to supplement your savings. 

In this case, we’re assuming you only have two potential retirement income streams on hand: Social Security and a $120,000 401(k). So, we start planning from there. What income can you expect from each asset? 

For your portfolio, this will depend on how you manage your money. This is a profile where an annuity might be a very strong option, as these can sometimes maximize the value of relatively small portfolios. For example, say that you begin to take retirement at age 70. A representative annuity might generate $1,081 per month ($12,972 per year). While exposed to inflation, this income is significantly higher than the roughly $400 to $600 per month you could expect from a 4% withdrawal strategy off the same amount.

For Social Security, unfortunately this is a profile where you likely won’t qualify for maximum benefits. Social Security is built to maximize benefits for higher-earning households: The more you earn while working, the more you collect in benefits, to a point.

Still, assuming you’ve paid into the program, your next step is to begin planning for your actual Social Security income. You can visit the SSA and get a report on your actual benefits and credits, or you can use SmartAsset’s calculator for a likely estimate. Once you know what you will receive, you can begin to plan for that income. Your actual benefits will depend entirely on how much you earned over your working life, and for how many years. However, by way of example, the average retiree received $1,907 per month ($22,884 per year) in benefits. 

If you receive an average benefit check and purchase a representative annuity, you might be able to plan for around $35,856 per year of partially inflation-adjusted income. A financial advisor can help you make income projections based on your portfolio and risk tolerance.

Your next step is to figure out how you can maximize your streams of income. In all cases, your best first move will be to delay retirement until age 70 if you can. This will boost both your benefits and your savings.

First, waiting until age 70 will shorten your retirement. It will give you more years of living off your income, rather than your portfolio, and will give you a few more years to potentially save.

Second, even setting aside additional portfolio contributions, this can increase the value of your savings. For example, the representative annuity figure quoted above assumed that you invest now and collect payments in five years. If you collect payments in two years, at age 67, you might expect closer to $843 per month. Or, if you keep your money invested in an 8% growth mixed-asset portfolio, by age 70 it might grow to $176,000. 

Most importantly, waiting until 70 will increase your Social Security benefits to 124% of their base level. If you will pardon the informality, this can be a game-changer. For example, take the average benefit payment of $1,907 quoted above. If you wait until 70, this might increase to $2,364 per month ($1,907 * 1.24), or $28,376. Combined with a representative annuity at age 70, this can generate $41,348 per year of income.

Your next step is careful spending and tax management.

First, you will largely rely on Medicare for your health care spending. This will be essential, so make sure you understand your health needs and how they relate to this program’s coverage. In particular, be sure to purchase any necessary gap coverage in advance. 

Depending on your state, you may be able to rely on Medicaid for this gap coverage. You will almost certainly also need to rely on this program for any necessary long-term care in your later years, so make sure to understand your state program’s asset and income requirements. 

From there, it’s time to plan for taxes. If this is a standard 401(k) or other pre-tax portfolio, you will have to report withdrawals as taxable income. But if your adjusted gross income is low, your federal income taxes are likely to be relatively low as well. Still, between Social Security and portfolio income, you will likely make enough to pay around $1,200 to $1,500 per year in taxes. 

Finally, it’s time to make your spending meet your income. How this fits will depend significantly on your current lifestyle and location.

Take our example above, where you wait until age 70 and generate $41,348 per year of combined income. The rule of thumb is that retirement income can generally pay for about 80% of a pre-retirement lifestyle, so this income should generally pay for a working lifestyle of about $51,685. ($41,348 / 0.8) In some parts of the country this is not only stable, it’s quite comfortable. 

So, look at your budget. Will this work for you? Can you wait until age 70, and can you afford to live your current lifestyle on around $40,000 per year?

If not, begin to look at what you can cut. Often, the biggest fixed expense for any household is housing, particularly if you live in an expensive urban area. Moving can potentially help with this. By relocating to a more affordable community, you can adjust your housing costs down by potentially quite a lot. You will also likely reduce all of your other costs of living, from bills to food. Finally, by moving, you can venue-shop for a state with Medicaid laws that will help support your health care.  

If you have a low-savings retirement, don’t panic. You have time and opportunities to make sure that you are comfortable in your later years, but it will require some careful planning. However you choose to do it, though, maximizing the value of your portfolio will be essential. Managing spending and, potentially, relocating to an inexpensive community might be the key.

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