Nervous about your retirement planning? You're not alone. Americans' retirement planning is in a crisis. The crux of the problem is simple: Most people are not saving enough. Barely half, 50.5%, of U.S. households own retirement savings accounts, according to the Federal Reserve's latest data. And that's down from 52.1% in 2016. People fear they are in retirement saving trouble. No mystery why they're jittery. Even among people who do have retirement savings, the median value of their balances is just $65,000, says the Federal Reserve.
Social Security Is Not Enough
People who are in the homestretch for saving toward retirement — adults who are age 56 to 64 — have a relatively paltry median nest egg of $120,000. That amount of savings will generate less than $1,000 of monthly income, and that's only for 15 years.
15 years is not a long time considering how long people are retired these days, especially when retirement health care costs are soaring. U.S. life expectancy at birth is 77.8 years, and if you make it to age 65, you can expect to survive another 19.1 years. So in this case, you can expect to outlive your money by more than four years. The average social security benefit is only $1,544 per month, which totals about $18,500 per year. Even doubling that meager amount if you've got a spouse, $37,056 per year is not much to live off in your 70s, 80s and 90s?
Coronavirus Pandemic Hurt Americans' Retirement Planning
A big part of the retirement planning problem has been the crushing financial impact of the coronavirus pandemic. Eighty percent of Americans fear it will take them one to five years — or longer — to get their savings back on track, due to jolts like job loss or retirement withdrawals. Another problem is that many people don't have access to traditional pension plans like they used to. In the early 1990s, 35% of private-sector workers were covered by a pension plan, according to the Bureau of Labor Statistics. By 2017, just 8% of private-sector workers had an old-fashioned pension plan. So year after year, the odds grow that you're on your own when it comes to paying the bills in retirement, except for those scanty Social Security benefits.
6 Retirement Planning Steps To Reach Your Goals
So how do you boost your odds of being among those workers who save enough to afford the retirement they want? Here are 6 key steps for building a big enough retirement nest egg:
#1 - Start Retirement Planning Early
It's important to start early so you can let the power of compounding do the heavy lifting. Suppose you start saving for retirement at age 25 after beginning your first job. Let's say your yearly pay is $45,000, and you save 10%. You average 1% annual pay raises. Your retirement savings account grows 7% annually until retirement, which you plan to do at age 68. By then, your IRA, which has no company match of course, will have a balance of approx. $1.2 million. If you delay the start of retirement savings just 10 years? That would cost you about half your nest egg.
#2 - Make Sure You're Saving Enough
You should target setting aside 15% of your annual pay, including any company match in your 401k. If you can't kick in 10% or 15% right away, try to make small increases in your annual contribution until you reach the necessary level.
#3 - Avoid Taking Loans and Early Withdrawals
In today's economy, switching jobs has become more frequent. If you switch jobs, resist the temptation to withdraw your 401(k). Instead, roll it over into an IRA that you control. That way you won't have to pay income tax or penalties. The main trouble with loans and early withdrawals is that they deplete your savings and neutralize the compound growth that is building up your balance.
#4 - Use the Right Portfolio Allocation
Regardless of how close you are to retirement, making sure the allocation of your portfolio is appropriate is extremely important. Studies show that having the right asset allocation accounts for over 90% of whether or not you will meet your retirement savings goals.
#5 - Use The Right Tools to Save
There's one more trick to maximizing your retirement savings. You've got to use the right savings instruments. For example, if you have access to a 401k with a company match, you should take advantage of that before other retirement savings. Otherwise, you're leaving free money on the table. Second, consider using a Roth IRA. That's because after five years and age 59-1/2 you can withdraw Roth savings and earnings tax-free. And in retirement, when you are older and wealthier, you may be in a higher tax bracket than you were early in your work career, especially if you continue working in retirement. In this case, the tax benefit in retirement is worth more to you than the deduction on a non-Roth account is when you're young.
#6 - Make A Retirement Savings Plan, Stick To It
The final recommendation is to avoid tossing in the towel because you think it's too late.
Any amount you save is better than none, so it's important to make a plan and stick to it.
While most people focus on how much they want to save before retirement, your best bet is to start with a budget of how much you need to spend in retirement. Then calculate how much savings you need to generate that much income.
Final Thoughts
Following the tips shown above is critical to ensuring you have the assets you need saved to live the retirement you want. So if you haven't taken the time to develop your retirement plan, or are unsure if you're on the right track, there's no time like the present to get your plan started. To learn more about how you can get a plan in place to protect your retirement and family's financial future, schedule a call with our team today!
AUTHOR
Mike Bink, AAMS®, CCFS®
Mike is the founder & president of Equivest Financial Advisors. He is a husband, father of 3, and a fiduciary advisor who is passionate about helping his clients take control of their retirement and reach their financial goals. Learn more about Mike.