On Track For Retirement? Here’s How to Tell

In this retirement gif, Lindsey Vonn says she is not working any more. She is retired.

According to Schroder’s Retirement Survey, the percentage of those nearing retirement age who say they have enough money for retirement has dipped to 22%. Among those who have already retired, just 3% describe their situation as “living the dream,” while only 37% say they are comfortable.

Excuse me, but I have not worked this hard or this long to not be living the dream when I retire.

Making sure you are financially prepared for retirement is a complex process with ever more complications due to current market conditions. Taking the time to understand the different aspects of retirement planning will help ensure you enjoy a comfortable retirement. Although if you want to skip straight to a calculator, Vanguard has an awesome one here.

With no income from work, how do people pay for their expenses during retirement?

How is retirement funded?

People primarily pay for their retirement between savings (and investments) and Social Security benefits.

We’ll dive deeper into the different investment account types, but for most Americans, their current savings aren’t enough.

  • Women’s average total retirement savings in the U.S. is just $57,000, whereas men’s average total retirement savings is $118,000.
  • Compared to 80% of white Americans, only 61% of Hispanic Americans and 64% of Black Americans have some retirement savings.
  • 22% of Hispanic Americans and 29% of Black Americans report that their retirement savings are on track, while 43% of white Americans say the same.

How much should they save?

Fidelity’s rule of thumb is as follows. Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.

Why don’t people save more?

There are many reasons people don’t save more for retirement. Nearly 1/4 of Americans say they’ll never retire, while others believe Social Security will take care of everything.

Chances are, your social security won’t be enough. Here’s a breakdown of what social security is and why you shouldn’t rely on it to save for retirement.

Social security is a government-sponsored program that provides benefits to retirees, disabled people, and survivors of deceased workers. Payroll taxes from workers and employers fund the program.

According to the [Social Security Adminstration], the estimated average monthly benefits for all retired workers will be $1,657 beginning in January 2022. Before the COLA took effect, the average was $1,565, meaning seniors will receive roughly $100 more each month and $1,200 over the year as part of the COLA increase.

Go Banking Rates

So why shouldn’t you just rely on this money for retirement?

There are a few reasons. First, social security benefits are not adjusted for inflation. While there are cost of living adjustments, usually done annually, they do not match monthly inflation rates, as seen in June 2022.

Second, social security benefits are taxed. If you have other income in retirement (from a pension, 401(k), or IRA), your social security benefits may be taxed.

Third, you may not be eligible for social security benefits if you retire early. If you retire before you reach full retirement age (66 for people born between 1943 and 1954), your benefits will be reduced.

Fourth, the government could cut social security benefits in the future. Many believe social security is not sustainable in its current form, and benefits may need to be cut to make the program solvent.

In fact, 71% of Americans fear Social Security will run out in their lifetimes. Despite this, the savings rates are not higher. Why is that?

Others don’t have the extra cash to put away each month.

It could be that living expenses are rising and they’re already living paycheck to paycheck, or they’re putting their current needs ahead of their future goals.

Present Bias

When it comes to retirement savings, present bias is a big problem. This cognitive bias refers to our tendency to value immediate rewards more highly than future rewards. In other words, we’re more likely to make decisions that benefit us in the short term, even if they’re not necessarily good for us in the long term.

This can have a severe impact on our retirement savings. For example, let’s say you have the opportunity to sign up for your company’s 401(k) plan. The decision to do so requires you to sacrifice some of your current income to save for retirement. The immediate gratification of having more money in your paycheck today is often more appealing than the delayed gratification of a comfortable retirement down the road. As a result, many people choose not to enroll in their 401(k) plan, even though it would be in their best interest.

Present bias can also lead us to make poor investment choices. We may be tempted to invest in riskier assets to earn a higher return, even though this may not be the best decision for our long-term financial security.

We may also procrastinate when it comes to saving for retirement since we’re more focused on meeting our current needs and less concerned about our future selves.

The reality is that every cent and second counts when it comes to saving for retirement.

This is due to the power of compounding, which allows your savings to grow exponentially over time.

For example, let’s say you start saving $5 a week at age 25. If you continue doing this for 40 years, you will have saved a total of $20,800. However, due to the power of compounding, your money will have grown to over $100,000 by the time you retire.

What if I can’t afford to save for retirement?

If you can’t afford to save for retirement, don’t despair. There are a few things you can do to make it more affordable.

First, you can start by saving what you can. Even if it’s just a small amount, every little bit helps.

Second, you can start tracking and categorizing your expenses. The truth is, most people significantly underestimate their costs. When you track your transactions, you get a clear picture of where your money is going. This can be eye-opening, and it can help you make better budgeting decisions.

Third, you can try to boost your income. If you can earn more money through side hustles, you will be able to save more for retirement.

Finally, you can delay retirement. If you can work for a few extra years, you will have more time to save.

Here’s how to calculate how much you will need.

There’s no one-size-fits-all answer to this question, as everyone’s retirement needs will differ. In fact, you could skip the rest of the article and go straight to a retirement calculator.

However, there are some steps you can take to calculate how much you will need to save.

  • To start, you will need to consider how long you want to be retired. This will help you estimate how much income you will need to cover your costs.
  • Next, you will need to consider what kind of lifestyle you want in retirement. Do you want to travel the world or stay close to home? Do you want to downsize your life or live extravagantly?
  • Finally, you will need to factor in inflation, the rate at which prices for goods and services increase over time. Inflation can affect your retirement savings, so it’s important to account for it when calculating how much you need to save.

Now let’s take a closer look at each of these factors.

For how long do you want to be retired?

The average life expectancy in the United States is about 79 years. However, this number will differ based on factors like your gender, lifestyle, and family history. If you want to be on the safe side, you may want to plan for a retirement that lasts 20-30 years.

What kind of lifestyle do you want in retirement?

Your budget will largely determine your lifestyle in retirement. If you want to travel the world or live extravagantly, you need a larger budget. On the other hand, if you’re content with staying close to home, you can get by with a smaller budget.

How much does inflation affect retirement?

Inflation is the rate at which prices for goods and services increase over time. In the United States, the inflation rate is currently about 8.6%. On average, prices for goods and services will increase by that much each year.

Inflation can have a significant impact on your retirement savings. If you don’t account for it, your money may not go as far as you’d like. For example, let’s say you have $50,000 saved for retirement, and the inflation rate is 2%. In 10 years, your $50,000 will only be worth $40,000 in today’s dollars.

To account for inflation, you will need to increase your annual savings. This is often referred to as “saving for real.” For example, if you’re saving $5,000 per year and the inflation rate is 2%, you will need to save an extra $100 each year to keep up with inflation.

You can use this retirement lifestyle calculator to get an idea of how much income you will need in retirement.

Click this link to read more about the rising cost of living.

Types of retirement accounts

There are a few key things to remember when saving for retirement. First, you’ll need to decide which type of retirement savings is right for you. There are a few different options, including traditional IRA’s, 401k’s, and HSA’s. Each has its benefits and drawbacks, so research before deciding which one is right for you.

Types of employer-sponsored benefits

A pension plan is an employer-sponsored retirement savings plan. That means your employer sets up and contributes to the program on your behalf. The money is then used to provide you with a regular income during retirement.

On the other hand, a 401(k) is a retirement savings plan that you set up and contribute to yourself. Your employer may also choose to make contributions on your behalf, but it’s not required. With a 401(k), you’re in control of how much you want to contribute and how it is invested.

According to the Bureau of Labor Statistics, just 26% of workers have access to a pension plan compared to 60% who have access to a defined contribution plan.

403(b)s: This is similar to a 401(k), but non-profit organizations offer it.

457 plans: This type of plan is offered by state and local governments and some non-profit organizations. Employees can have a certain amount of their paycheck automatically deducted and invested in the account.

Other types of retirement accounts

You can choose from several types of retirement accounts, each with its own set of benefits and drawbacks. The most common are traditional IRAs, Roth IRAs, and HSAs.

Traditional IRA

A traditional IRA is a tax-deferred retirement account. This means you won’t have to pay taxes on the money you contribute to your account until you withdraw it in retirement. The downside to a traditional IRA is that you will be required to pay taxes on the money you withdraw in retirement.

Roth IRA

A Roth IRA is a retirement account that allows you to withdraw your money tax-free in retirement. The downside to a Roth IRA is that you will have to pay taxes on the money you contribute to your account now.

HSA

A Health Savings Account (HSA) is a tax-advantaged account that can be used to save for medical expenses. The money you contribute to your HSA can be used tax-free to pay for qualified medical expenses. The downside to an HSA is that you must be enrolled in a high-deductible health insurance plan to contribute to one.

Start saving for retirement and do it regularly

Once you’ve chosen your retirement savings vehicle, the next step is to start contributing regularly. Even if you can only afford to put away a small amount each month, it’s important to start saving now to take advantage of compound interest.

Calculate how much you’ll need to save for a comfortable retirement.

How much do you actually need to save, and are you on track for retirement? The answer depends on various factors, including your age, lifestyle, and anticipated retirement expenses.

You can use several different methods to calculate how much you need to save for retirement. One popular method is the “4% rule.” This rule of thumb states that you should withdraw 4% of your portfolio each year in retirement, adjusted for inflation. So, if you have a $50,000 portfolio, you would withdraw $2,000 in the first year of retirement. Assuming you need $40,000 to spend annually, you will need to save $1 million by the time you retire.

While the 4% rule is a valuable starting point, it doesn’t consider your specific circumstances. For example, if you plan to retire early or have a higher than average retirement lifestyle, you may need to save more than 4% each year to maintain your standard of living.

You can use a retirement calculator to get a more accurate estimate of how much you need to save for retirement. This tool will give you a personalized savings goal by accounting for factors like your age, anticipated retirement expenses, and investment returns.

Whatever method you use to calculate your intended retirement savings, the most important thing is to start saving as early as possible. The sooner you start saving, the more time your money has to grow. And, the more time your money has to grow, the less you’ll need to save each month to reach your retirement goals.

So, if you’re not already saving for retirement, now is the time to start. Even if you can only save a small amount each month, it will make a big difference in the long run.

Related Reads:

How to Save for Retirement if You Don’t Make a Ton of Money

Compound interest Explained

401(k) v IRA for the Self-Employed

How to Save More Money

Saving for Retirement 101

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