Home Stretch

by Jimmy Magahern

Entering retirement without a nest egg? Don’t panic. Putting your passions to work while scaling down financial obligations is an old ethos that’s finally found its time.

When most people talk about the “gig economy,” they’re typically thinking about young people – Millennials or Gen X members – running their various web businesses out of a table at the local Starbucks, free-thinking types looking for more flexibility than a traditional job provides, or maybe upwardly-mobile hipsters working trendy “side hustles” to supplement the meager income from their 9-to-5 jobs.

But Kathy Stokes, a senior advisor of “financial resilience” at AARP, suggests older adults edging toward retirement might actually be the ones who can benefit the most from such unconventional income-making opportunities.

“People [this age] look for a variety of ways to bring in some extra money,” says Stokes, who recently co-hosted a live webinar on retirement planning on the AARP website. “If you’ve looked through everything you can and are still having a hard time freeing up money just by cutting your expenses, maybe there are opportunities in the gig economy, for example, to earn a few dollars here and there. You know, renting out a room through Airbnb or one of those types of opportunities, or ride sharing. There are other types of gig economy jobs where you can trade on your professional skills. For example, if you have a hobby like woodworking, you can find work doing that and actually get paid for it. So those are some things to consider as you’re trying to find some more money to put away.”

In Stokes’ view, there’s a sweet irony in seeing the generation that, ideologically, always put passion before profits finally discovering that doing what they always loved may, in fact, be all they need – coupled with their Social Security income.

Stokes says she spends a lot of time advising people approaching retirement age who still haven’t managed to save up a nest egg – a segment that’s been growing, as Baby Boomers who’ve always been resistant to confronting aging are finding themselves entering their 60s and still living paycheck to paycheck. A 2018 consumer survey conducted by personal finance website GOBankingRates found that 42 percent of Americans have less than $10,000 saved for retirement. That’s a problem, since the Bureau of Labor Statistics says that, on average, adults 65 and older spend close to $46,000 a year on living expenses.

If you’re in that boat, don’t panic, say the experts. You may have to continue working longer than expected, but your second (or maybe third) act may be an opportunity to turn your long-held passions into income-generating opportunities.

“What you may want to consider as well is how you define retirement and what you want to do in the next stage of life,” says Michelle Singletary, a personal finance columnist at the Washington Post. She suggests that may be about “part-time jobs, pursuing your life passion, starting a new business.”

“This is what younger generations are already expecting,” adds Tim Maurer, a certified financial planner and author of Simple Money: A No-Nonsense Guide To Personal Finance. “I see individuals who are more keenly interested in finding work that they enjoy and could do indefinitely.”

Maurer suggests working longer can be healthy – not just financially, but medically as well. “It appears we are not wired for endless retirement,” he recently told reporters at financial site The Balance. “We are wired to be doers. Medical professionals say that’s better, in terms of warding off dementia and Alzheimer’s.”

401, ‘K?

If working longer lacks appeal, advisors say there are several things you can do, even in your 60s, to ensure you have enough money to float through your retirement years.

The first thing, if you’re still working, is to make sure you’re enrolled in your company’s 401(k) or an individual retirement account (IRA).

“If you have a workplace retirement plan, such as a 401(k) or 403(b), and your employer offers a matching contribution, make sure you’re getting the maximum match,” writes personal finance expert Suze Orman on AARP’s retirement blog. “If you need to increase your contribution rate to earn the maximum employer match, do this ASAP. This is free money.”

Ultimately, it’s best if you enroll in such a plan earlier in life – say, in your 20s – but if you put it off until you’re well into your 50s or beyond, there are “catch-up” measures you can take advantage of.

“If you are in a 401(k) plan, the current annual contribution limit under IRS rules is $18,500,” Stokes says. “But if you are 50 or over, you can save an additional $6,000 in that account. And if you’re in an IRA, $5,500 is the annual contribution limit, but if you’ve reached age 50, it’s another $1,000 that you can save.”

Increasing your contribution level can be hard, but there may be opportunities. “When you get a raise or a bonus, or let’s say you even get a tax refund, share some of that money with your ‘future self,’ with your retirement savings,” Stokes recommends. “It’ll be easier to do if you splurge just a little and do something for yourself, but then put the rest of that toward your savings goal.”

While it may be tempting to withdraw money from a 401(k) plan, early cash-outs result in taxes, penalties and, most damaging, the loss of further retirement income that could be generated by letting the plan mature.

“When you cash out of a retirement plan before the age of 59½, you are not only subject to income taxes on the entire value, but also to a hefty early withdrawal penalty,” writes retirement planning specialist Jeremy Vohwinkle. “This can be a pricey move. For some people, this means nearly cutting the account value in half.”

Social Security benefits become available as early as age 62, but it’s also best not to touch that income too soon. “If you’re in good health, the best financial move you can make is to delay taking your retirement benefit until age 70,” Orman writes. “If you were born in 1960 or later, your monthly benefit at 70 will be 77 percent higher than if you start at 62, the earliest age to claim your benefit. I can’t think of another investment in the world that can live up to that guarantee.”

Both Orman and Stokes also recommend some major shifts in priorities – particularly when it comes to providing for your adult children. “For people who are dealing with the situation of trying to figure out how to send their kids through college and also funding their retirement, my strong guidance is to focus on the retirement aspect,” Stokes says. “Because when you go to college, you can get student loans and grants and whatnot. But you can’t get that for retirement.”

They may balk now, Orman says, but in the end they’ll be happier in the coming years if you’ve got your own finances covered. “Ten, 20 and 30 years from now, your kids will thank you for focusing on building some retirement savings,” she says. “Every dollar you manage to save is a dollar they will not feel compelled to pitch in to help an older you.”

Scale back on spending

Last year, streaming TV viewership increased by 45 percent among people in the 50-to-64 age group. Today, the average retired American spends $205 per month on entertainment, much of that on subscription video services like Netflix and Hulu and streaming music services like Apple Music and Spotify.

Unfortunately, retiring without a nest egg usually requires cutting back on many of the non-essential monthly expenses you’ve become accustomed to.

“The big focus for all of us should really be about needs versus wants,” Stokes says. “Do you need that $4 latte every morning, or could you get by with brewing your own drip coffee? You don’t think it adds up, but it really does.”

In the webinar, Stokes and cohost Jean Setzfand ran through some basic money saving tips. Taking a defensive driving course, for example, can save most people about 10 percent on their annual auto insurance premiums – as much as $200 per year, on the average. Replacing a house full of incandescent bulbs with new LEDs can save as much as $1,500 over their 10-year life span. Drinking office coffee or making coffee at home instead of buying it at a coffee shop can save you up to $1,000 per year. And simply cleaning your dryer’s lint trap after every use can save you about $100 on the annual cost of operating a dryer.

Just as retirees are turning to the gig economy for extra income, many are also following the lead of the younger generation in adopting innovative cost-saving choices – such as selling their cars and getting into ride-sharing services to eliminate maintenance expenses and insurance bills, choosing generic products over name-brand whenever possible and, of course, ditching telephone landlines and opting for cheaper cell phone packages.

“It’s important to get real with ourselves about how we’re making use of whatever income sources we have,” Stokes says – and that applies to how we shop, too. “If you aren’t sure, when you’re in a store, whether you really need, say, that new pair of shoes or you just want them, put them down and walk out. Give it a few days before making a decision to spend that money.”