Adjusting Your 2024 Retirement Plan For Income Shortfalls

The economic landscape at the start of 2024 presents retirees and soon-to-be retirees with both challenges and opportunities. With shifting market dynamics, evolving policies, and global uncertainties, individuals must reassess and adjust their retirement plans to ensure financial security in the face of potential income shortfalls. Even though Social Security checks are going up by 3.2% thanks to a cost-of-living boost, Medicare Part B’s costs are also climbing by 6%, showing how our gains can sometimes be eaten up by expenses.

Consult with a seasoned financial advisor who can help adjust your retirement plan to make up for any income shortfalls that you may encounter in the later years of your life.

In this article, we delve into the intricacies of retirement planning in 2024 and explore actionable strategies to mitigate risks and bolster financial stability in retirement.

Below are certain steps that will help you make your 2024 retirement plan flexible and adjust for income shortfalls:

Step 1: Identify income sources that will fund your retirement years

The Vanguard Retirement Outlook report points out that a big problem for many people is not having enough money in retirement. It shows that retirement readiness varies greatly depending on how much you earn and your age group. Specifically, the report says that older baby boomers with lower incomes might only be able to spend 64% of what they used to earn before retiring. This is in contrast to current retirees from the same group who need about 96% of their pre-retirement income to cover their expenses.

While a keen awareness of potential income shortfalls is requisite for navigating the retirement landscape, you can achieve it only once you are aware of the income sources that you plan to fund your retirement. Diligently identifying diverse income sources can enable you to secure a financially stable retirement. Below are the key income sources you may consider:

1. Social Security Benefits

These are government-provided benefits that offer a predictable monthly income in retirement, calculated based on an individual’s earnings history. The age at which an individual chooses to start claiming these benefits significantly affects the monthly amount received, with deferred claims leading to higher payouts.

2. Retirement accounts

This category includes tax-advantaged saving vehicles such as 401(k)s and IRAs, which are essential for accumulating retirement savings. The growth potential and tax benefits associated with these accounts make them key components of retirement planning, and strategic withdrawals are necessary to optimize retirement income.

3. Pensions

Pension plans provide a fixed income in retirement, determined by the retiree’s years of service and salary history. Although less prevalent in the current retirement landscape, they offer a stable source of income for those who have access to them.

4. Investment income

Income is generated from investments held outside of retirement accounts, such as stocks, bonds, and mutual funds, through dividends, interest, and capital gains. This source of income requires active management and strategic planning to ensure consistent cash flow.

5. Annuities

Financial products purchased from an insurance company that provides guaranteed income for a specified period or the lifetime of the annuitant. Annuities are used to mitigate the risk of outliving one’s savings by providing a steady income stream in retirement.

6. Part-time employment

Engaging in part-time work during retirement can supplement income and offer the opportunity to stay active and utilize professional skills. This source of income adds flexibility and additional financial security for retirees.

7. Rental income

Income derived from owning and leasing out real estate properties. This source can provide a consistent and passive income stream, although it requires property management and entails certain responsibilities.

8. Home equity

Leveraging the equity built up in a home through downsizing, reverse mortgages, or home equity lines of credit can provide funds to support retirement expenses. This approach requires careful consideration of the implications and costs involved.

Step 2: Estimate your expenses in retirement

While envisioning your life in retirement, it’s important to consider not just the everyday costs of living, but also the significant impact of healthcare, inflation, and unforeseen expenses that could arise. Below are some expenses that you must prepare for and consider when adjusting your plan:

1. Healthcare Costs

One of the most significant and often underestimated expenses in retirement is healthcare. As we age, healthcare needs invariably increase, and so do the costs associated with them. It’s essential to research and plan for these expenses, including Medicare premiums, out-of-pocket costs, and long-term care.

2. Inflation

Inflation can erode the purchasing power of your savings over time. Even at a modest rate, the cost of goods and services can significantly increase over a 20 to 30-year retirement period. Planning for inflation means assuming that your expenses will grow each year and ensuring that your income sources can match or exceed this growth.

3. Unexpected Costs

Life is unpredictable, and unexpected costs can arise from various sources, such as home repairs, helping family members financially, or significant changes in tax laws. Having a buffer in your retirement savings to cover these unforeseen expenses is wise. It’s also a good idea to maintain some flexibility in your spending plans to accommodate these potential costs.

Remember, the goal of estimating retirement expenses is not just to come up with a number but to develop a comprehensive understanding of your future financial needs. This understanding will allow you to make informed decisions about saving, investing, and ultimately enjoying a comfortable and secure retirement.

Many financial institutions and retirement planning websites offer calculators and resources to help you estimate your retirement expenses more accurately. By doing so, you can create a more resilient financial plan that is better equipped to handle the realities of retirement. You may also consider hiring a financial advisor who can help with the calculations, savings options, and other necessary considerations.

Step 3: Follow effective adjustment strategies

Once you have an idea about income sources and approximate expenses that you may incur, the next step is to equip yourself with adjustment strategies that can help make your plan resilient to the economic climate. Some of them are explained below:

1. Reduce your spending

Reducing expenses can significantly extend your retirement savings. Consider downsizing your home or relocating to a more affordable area to decrease housing costs, which are often the largest expense for retirees. You may also review and cut back on discretionary spending, such as dining out, entertainment, and travel. Embracing a more minimalist lifestyle by identifying what brings you joy and eliminating unnecessary expenses can make the golden years worthwhile without burdening you financially. Additionally, you may also take advantage of senior discounts and prioritize spending on experiences over material goods.

2. Enhance your income

While it may not seem as easy as it sounds, increasing your income can provide more flexibility in retirement. Delaying retirement or working part-time can help grow your income alongside potentially increasing your Social Security benefits. You may also consider turning a hobby into a source of income. For homeowners, tapping into home equity through downsizing, a reverse mortgage, or a home equity line of credit can provide a significant financial boost. Renting out a portion of your home or property can also generate additional income.

3. Reassess your investments

Reassessing your investment portfolio can ensure that your plan remains relevant to your current financial situation and goals. As you approach retirement, it’s crucial to strike the right balance between growth and risk. While shifting towards more conservative investments can protect your nest egg from market volatility, maintaining some exposure to stocks can offer growth potential to counteract inflation. Be mindful of your financial bandwidth and goals and keep an eye on the markets to make informed decisions. Regularly reviewing and adjusting your portfolio can help you maximize your investments while navigating the risks.

4. Be mindful of safe withdrawal rates

A key component of this adjustment to accommodate income shortfall involves understanding and adapting the ‘withdrawal rate’ – the percentage of your retirement savings that you withdraw annually to cover living expenses. Traditionally, the ‘4% rule’ has been a benchmark for safe withdrawals. It suggests that retirees could withdraw 4% of their retirement corpus in the first year, adjusting for inflation in subsequent years, without a significant risk of depleting their funds over a 30-year retirement period.

However, changing economic conditions, including lower expected returns and increased market uncertainty, have prompted a reassessment of this conventional wisdom. Recognizing these challenges, Morningstar has recommended a revised safe withdrawal rate of 3.8%.

By adopting a 3.8% withdrawal rate, retirees can extend the longevity of their retirement portfolios. This conservative strategy decreases the amount withdrawn annually, thereby reducing the strain on the retirement corpus and increasing the likelihood that the savings will sustain the retiree’s financial needs throughout their retirement years.

5. Leverage SECURE 2.0 and long-term care strategies

The Secure 2.0 Act gives a bit more breathing room for your retirement savings by letting you wait until you’re 73 (instead of 72) to start pulling money out, if you’re reaching 72 after 2022. This means your savings get another year to grow. Plus, the Act boosts the limit for certain annuity contracts up to $200,000, letting you put off taking some income until later, which could make your retirement funds stretch further.

Thinking about how to handle long-term care costs is just as important. Options like long-term care insurance and reverse mortgages can help here. Reverse mortgages are especially interesting because they let you use the value of your home to get some cash, without having to sell your house. This can be a lifesaver for covering long-term care without dipping into other savings. These moves, inspired by the SECURE 2.0 changes and smart planning for care costs, make your retirement planning more flexible and sturdy, ready to face whatever the economy throws your way.

6. Leverage artificial intelligence

Incorporating Artificial Intelligence (AI) into your retirement planning process represents a forward-thinking approach that can enhance the way you and your advisors predict, plan, and manage your retirement funds. AI’s capability to sift through and interpret large datasets can provide deeper insights into market movements, investment risks, and potential opportunities, facilitating more informed and strategic decision-making.

It’s important, however, to view AI as an augmentative tool rather than a standalone solution. While AI excels in offering predictive analytics and tailored investment recommendations by analyzing past trends and data, it doesn’t grasp the personal nuances that influence retirement planning, such as individual goals, emotional factors, and specific life situations. Therefore, the integration of AI should aim to bolster the efficiency and accuracy of technical analyses and projections, but the essence of decision-making should remain a human-centered process. This approach ensures that the technological precision of AI is balanced with the contextual and personal judgment critical to achieving tailored and meaningful retirement outcomes.

7. Bank on the time-tested strategy of diversification

When it comes to building a retirement portfolio, diversification remains a cornerstone strategy. It involves spreading investments across various asset classes to reduce risk and volatility. Relying too heavily on stock market predictions, even those aided by sophisticated AI models can be risky. Stock market forecasts, regardless of their analytical foundation, carry inherent uncertainties due to the unpredictable nature of global economic events, market sentiment, and other external factors that can dramatically impact market performance.

Therefore, it’s crucial to maintain diversified income strategies that are not overly reliant on stock market performance. This includes considering bonds, real estate, annuities, and other investment vehicles that can provide stable income streams and capital appreciation outside the stock market’s fluctuations.

To conclude

As we look ahead to 2024, the ever-evolving economic landscape demands a proactive and flexible approach to retirement planning. Adjusting your retirement strategy in the face of income shortfalls is not just about safeguarding your financial future; it’s about empowering yourself to face uncertainties with confidence and resilience.

Remember, the essence of a well-adjusted retirement plan lies in its flexibility and adaptability to changing circumstances. By integrating these strategies into your retirement planning, you’re not just preparing for the uncertainties of 2024; you’re setting the foundation for a retirement journey that is as rewarding as it is secure.

As you begin this journey, consider the value of professional advice. A trusted financial advisor can offer personalized insights and guidance tailored to your unique situation, ensuring that your retirement plan is not only robust but also aligned with your aspirations and life goals.

Use the free advisor match service to get matched with experienced financial advisors who can help you plan for income shortfalls that you may face during retirement and live comfortably during the later years of your life.

For further information on creating a suitable retirement plan for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.