Lifestyle changes can add up to big savings for retirement

Regular and well-informed course corrections can help you become more comfortable financially and enjoy retirement even more.

American retirement is a huge riddle. How do you save for something when you don’t know what it will cost or how long it will last? That’s the challenge faced by millions of Americans, so it may not be surprising that most are coming up short.

While most people realize retirement will be the biggest purchase of their lifetimes, averaging about $700,000 or about 2.5 times the cost of an average home, 81% say they do not know how much money they will need to fund retirement, according to a new study from Bank of America Merrill Lynch.

This lack of preparedness extends even to the wealthy. Of those with at least $1 million in investable assets, only 60% say they feel prepared for a 30-year retirement. Among those with $500,000 to $1 million in investable assets, the confidence level drops to 37%.

The study, conducted in partnership with Age Wave, a research and consulting firm, offers some insights into how key trends of U.S. demographics, increased longevity and the changing role of employer-provided benefits and personal savings are transforming retirement.

“To navigate this new landscape, today’s retirees and future generations will need to play a more active role, which includes closing the savings intention gap, planning ahead to meet their retirement goals and regularly course correcting along the way,” said Lorna Sabbia, head of retirement and personal wealth solutions at Merrill Lynch. The intention gap refers to the fact that most Americans admit saving less than they should, about 5.5% of their after-tax income on average.

This is not your typical report on retirement savings. The new study, “Finances in Retirement: New Challenges, New Solutions,” is the capstone of eight studies conducted over four years among 50,000 participants plus 43 focus groups of retirees and pre-retirees. The study concentrates on understanding the relationship between seven life priorities including family, work, health, home, giving, leisure and finances as they relate to retirement security.

“Although we are all challenged to fund our longer lives, this suite of studies has repeatedly revealed that Americans remain quite hopeful and are willing to consider a wide range of course corrections in order to enjoy a secure retirement,” said Ken Dychtwald, chief executive officer and founder of Age Wave.

While most retirement preparedness studies have focused primarily on savings patterns, this investigation uncovered numerous trade-offs Americans would consider in order to improve their financial security in retirement. People can make three basic kinds of helpful course corrections: small adjustments that could add up over the years; direct tradeoffs of one activity or expense for another; or larger, often one-time changes to financial status and future cost of living.

For example, if a 35-year-old smoker decided to quit his pack-a-day habit, he would not only save on the cost of cigarettes but would avoid smoker’s penalties on health and life insurance, saving about $12,000 per year. By age 65, the value of this course correction amounts to $360,000.

In another example, a 50-year-old couple could decide not to provide additional financial support to their son after he graduates from college. Instead, they could allocate that $6,800 per year towards their retirement, boosting their nest egg by about $105,000 by the time they are 65.

Or, a 60-year old couple could transition gradually from full-time work to part-time work for five years, improving their retirement finances by about $300,000 and allowing them to delay their Social Security benefits until they are worth more later.

In addition, a 61-year-old couple could optimize their Social Security claiming strategy and delay benefits until they are worth more, boosting their lifetime retirement benefits by about $215,000.

And finally, if a 62-year-old couple were willing to sell their home in New Jersey and buy a less-expensive home in South Carolina, it would leave them mortgage-free with an additional $115,000 to invest. In addition, they would save an average of $28,000 a year in lower real estate taxes and overall cost-of-living, boosting their savings by about $420,000 over the next 15 years.

The potential course corrections are different for everyone. By making regular and well-informed course corrections before and during retirement, Americans can become more comfortable financially and enjoy retirement even more.

More: Questions about new Social Security rules? Find the answers in my new ebook.
Mary Beth Franklin is a certified financial planner.