The concept of retirement has evolved over the decades. However, one thing that has not seemed to evolve is the lack of preparation. Looking at the statistics and various survey results paint a scary picture of an aging American population that does not understand the financial realities of retirement. There is also a lack of urgency for saving and investing for the future. Adding to the dilemma is a disconnect from reality when it comes to the eventuality of declining health and a need for very expensive long-term care.
For example:
- People are not saving close to enough for retirement. 30% of people aged 55 or older have less than $50,000 saved for retirement. 55% have less than $10,000 and 33% have nothing saved for retirement.
- Social Security alone is not enough for retirement. More than half of people on Social Security rely on their monthly check for 50%-100% of their retirement income, but the average monthly benefit is $1,600. 74% of people expect to continue working while in retirement.
- 70% of people age 65 or older will need some form of long-term care in their lifetime, but 84% of people don’t believe the need for long-term care will happen to them. If it does, they believe it will just be taken care of without any real understanding of the types of care and how to pay for any of it.
How early should people start saving for retirement?
American savings rates spiked in 2020 during the lockdown and stimulus period. However, rates are returning to historic levels. People are feeling the crunch from inflation further eroding their ability to save and invest for the future.
The earlier people start to save for retirement, the longer they will have to benefit from tax-deferred compound growth in accounts such as 401 Ks and IRAs. For example, assuming an annual growth rate of 7%, money in a retirement account will double about every 10 years. In other words, someone who starts putting as much as possible in these accounts in their 20s has a huge advantage over someone who doesn’t start until they are in their 40s.
But, not enough workers are taking advantage of employer-sponsored retirement plans. Too many that do are dipping into their retirement savings to help make ends meet. Almost half of Baby Boomers have now reached retirement age. By 2025, the first of the Baby Boomers will start turning 80.
How much should people be saving in order to comfortably retire?
A couple of metrics to consider for how much money a person will need to have saved in retirement is that to replace your income once you stop working, you will need enough saved to generate 70% of your annual income. To do this a person who waits until age 35 to start saving will need to put away 24% of their income. If they wait to start until age 45, they would need to save an impossible 44% of their income. Another measure of how much money is needed to replace your income in retirement is you would need to have saved 10x 1 year of your income in retirement accounts by the time you retire.
What are some of the best ways to save for retirement?
The best and easiest possible way to save for retirement is to take advantage of tax-deferred retirement accounts with 401 Ks and IRAs. With a 401K, you are putting away pre-tax dollars. Often times an employer will match a percentage of the money you are putting away. The accounts will grow for years without any tax consequences. Critical to getting the most out of the accounts is to avoid the temptation of taking money out. Then, facing a 10% tax penalty on top of income taxes for what you have withdrawn.
Another strategy is making sure you are accruing the maximum work hour and income credits possible towards Social Security. The goal is to max out your hours and income to get to the top monthly income level when taking Social Security. Also, waiting to start taking your benefit to age 70 will get you to the top monthly income level. If you start collecting at age 62, you will be locked into the lowest benefit amount you are entitled to. However, if you wait the amount will grow every year until you max out at age 70.
How do people save for retirement if they are struggling to live on the income they have right now?
Two key strategies to improve current financial circumstances to improve your ability to save for the future. One is to reduce your expenses and set a monthly budget. Second, eliminate all debt you can as fast as possible. The sooner you can establish a budget that will keep you living within your means and then eliminate the drain of paying high-interest rates on debt, the sooner you will be able to free up income to put towards savings.
It’s never too late to start planning for a well-balanced retirement. Coming soon from Advantage|ForbesBooks, Retire Like a Genius is your go-to guidebook for a happier and healthier life in a well-balanced retirement.