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When we’re working, we are acutely aware of how our income matches up against our cost of living. But what will that cost of living be when you’re no longer working? If you’re planning on retiring, it’s more than you think and you may not be as prepared as you need to be. In fact, according to Northwestern Mutual’s 2018 Planning & Progress Study, a third of Americans have saved less than $5,000. That means those US pre-retirees have only enough in savings to last a few months if they had to retire tomorrow. Could you manage that?

Why the shortfall in retirement savings?

One reason many people haven’t saved enough is that they’ve underestimated the amount of money they’ll need for retirement.

A new Schroders study states that pre-retirees aged 55 and older underestimate this amount by a sizable margin and to make that worse, they have not saved enough even for that underestimated figure:

  • Americans estimate that living expenses will eat up about 32 percent of their income when that figure is really 54 percent.
  • They anticipate they will need 76 percent of their current salary in retirement but have only saved 63 percent on average—a 13 percent gap.

Plus, Gallup reports that some Americans may be betting that they can rely on Social Security benefits to cover living expenses. However, if Congress doesn’t reinforce the Social Security Trust Fund, it could be insolvent by 2034—which does not bode well for people at age 50, approaching retirement age.

A third retirement expense gap – healthcare costs

In addition to misjudging the cost of living and not saving the funds they’ll need to cover their day-to-day expenses, many pre-retirees don’t appreciate how much of their Social Security benefits could wind up going to healthcare costs. A Nationwide survey notes that a retiree who claimed Social Security at 62 can expect to spend about 64 percent of their Social Security income on health expenditures. That does not leave much for other daily living expenses and the leisure activities so many people look forward to when they stop working.

Self-direct your savings solution

What’s the solution to ensuring that your retirement doesn’t get derailed by miscalculating expenses? For many investors, it could be a self-directed IRA.

With a self-directed IRA, you can take control of your future, bolstering your retirement nest egg by investing in alternative assets that you know, understand, and may already be investing in outside of your existing retirement plans.

Don’t underestimate the cost of living in retirement – it will only continue to rise – and don’t underestimate the value of self-direction. You can open a new account with a relatively small amount of money, enjoy all the same tax advantages of regular plans, and build a more diverse portfolio that you control. For savvy investors who are comfortable making their own investment decisions, a self-directed IRA can often be the difference between a short fall and no fall.

Read more about self-direction in our white paper library or contact Next Generation with your questions; call us at 1.888.857.8058 or email NewAccounts@NextGenerationTrust.com.