How to make sure your retirement income will work for you

By Jean C. Setzfand 

If you saved, say, 10 percent of your salary for the rest of your working life, do you think that would be enough to get by? The so-called “experts” have long pegged that as the target savings rate, but how would you know whether it would meet your individual needs?

There are plenty of calculators out there to will tell you how much money you might have saved by the time you retire; some will even tell you how long that money might last. But here’s the thing: Running out of money isn’t exactly a viable option.

That’s why AARP recently redesigned its retirement calculator to focus on calculating and budgeting your total retirement income instead of your guesstimated retirement savings.

In our new calculator, you can’t ever run out of money. After you enter information about your current savings and savings rate, we show you how much annual income that might give you for the rest of your life – and then we show you ways to boost that income.

The calculator also shows you a red line that is the target income you would need to keep your current lifestyle after inflation is built in. If it doesn’t look like you’ll hit that target, the calculator gives you options. Lots of them.

If you can’t access the new calculator from a desktop or laptop computer, here are a few ways to solve an income shortfall problem:

Delay your Social Security claim. Too many Americans race to claim Social Security the day they are first eligible. That can cost them – and their families – big-time in the long run. If you claim at 62, your benefits will be significantly reduced for the rest of your life. If you wait a little longer to claim, your benefits check will grow as much as 8 percent annually (until you hit age 70) for each year you delay. The difference between claiming early at 62 and claiming late at 70 is staggering: Your check will be more than 70 percent larger if you wait until 70 to claim. However, there may be some people who can’t wait, such as those unable to work, or who would eventually get a much larger benefit on their spouse’s account when he or she retires.  The AARP Social Security Benefits Calculator will walk you through various strategies for maximizing your benefits.

Work a little longer. The longer you work, the more time you will have to save money (and build pension or delayed Social Security credits), and the later you will be forced to start drawing on your savings. Even part-time work can help tremendously. Bear in mind, though, that some of your Social Security benefits will be withheld if you claim early but then continue to work. If you wait until your “full retirement age” (usually 66 or 67) to claim Social Security, you can collect your full benefit check even if you continue to work.

Adjust your lifestyle. Of course this seems like a no-brainer, but the new AARP Retirement Calculator shows you the projected national averages for various living expenses in your retirement. You can choose which ones to cut back on – say, downsizing or paying off your mortgage – and see the impact on your retirement income.

Consider buying an annuity. If it looks like you won't have enough income to support a long retirement, you might want to use a portion of your savings to buy a lifetime income annuity. In exchange for the upfront premium, a life insurance company will provide you a guaranteed level of income for the rest of your life – no matter how long you live. For example, if you paid $100,000 for a lifetime income annuity when you were 65, you would receive about $6,000 a year for the rest of your life, regardless of what the market does. It makes more sense to buy an annuity when interest rates are higher, because you will lock in a higher monthly payout.

In addition to the two tools mentioned above, AARP offers a comprehensive set of retirement decision-making tools at www.aarp.org/readyforretirement. Working forever is rarely an option, but running out of money should never be an option.

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Jean C. Setzfand is vice president of the financial security issues team in the Education and Outreach group at AARP. She leads AARP’s educational and outreach efforts aimed at helping Americans achieve financial ‘peace of mind’ in retirement. She can be reached at jsetzfand@aarp.org or on Twitter at @JSetz.