While much information about retirement saving focuses on investment strategies such as asset allocation "even perfect investing is unlikely to have a significant effect" on the retirement financial security of large numbers of people, according to the Center for Retirement Research.
That’s because the typical household approaching retirement has less than $100,000 in financial assets, it said. Specifically, it said, the typical household aged 55-64 has about $50,000 in a defined contribution savings program—such as the federal TSP or a private sector 401(k)—plus about $30,000 in other financial assets and about $37,000 in other assets, apart from the equity in a home.
The paper suggests that three strategies can significantly improve financial security:
Spend less today. "For households in their 50s, who are typically in their peak earning years, it is tempting to boost spending and live it up a bit – especially for couples whose children have left home," the report says. "However, tempering this urge and keeping a lid on spending boosts retirement preparedness in two ways – one obvious and one not. First, households that are able to cut their budgets can save more in their 401(k)s before retiring, expanding their nest egg. The less obvious benefit from spending less is that it reduces what households need for their day-to-day expenses today, thus lowering the bar for maintaining their lifestyle in retirement."
Work longer. That provides more time to build up retirement savings and it "shrinks the period over which retirement assets need to be stretched." Also, working beyond the minimum Social Security benefits claiming age of 62 increases the value of an individual’s benefit, by about a third if waiting until age 66 and by about three-fourths if waiting until age 70.
Consider tapping home equity later. The typical household as described above has $140,000 in home equity, which can be accessed by those ages 62 or older through a reverse mortgage that allows them to stay in their home.
"Each one – particularly working longer – is a more potent alternative than asset allocation for most households," the report says.
