Retirement is one of the few goals shared by nearly everyone. While most get there in the end, many find that this new era of supposed freedom comes with increasing financial constraints. Hopefully, you can afford to cover at least your basic living expenses in retirement, but thousands of Americans fall short of this goal, either because they cannot save as much as they should or because they underestimate the true costs of their retirement.
Median retirement savings for American workers sit at around $50,000, according to a recent Transamerica study. The Bureau of Labor Statistics reports that the average household headed by an adult 65 or older will spend this in nearly one year. If we assume this average spending with adjustments for inflation over a 30-year retirement, it's not unreasonable to think retirement could cost $1.5 million to $2 million or more. This can seem an impossible goal for those sitting with $50,000 or less in their retirement accounts right now, but with a few of the strategies below, it just might be possible.
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Know your goal
No matter how much money you have saved for retirement, your first step is the same as anyone else's: Create a detailed retirement plan. Start by estimating the length of your retirement by subtracting your preferred retirement age from your estimated life expectancy. One in three 65-year-olds today can expect to live past 90 and one in seven will live past 95, according to the Social Security Administration so, to be safe, plan for a long life.
Total up your average estimated costs in retirement. Start with basic expenses first, like food, housing, and healthcare. Then, you can allot some extra money for travel and entertainment if you choose. Multiply your estimated annual retirement expenses by the number of years of your retirement, adding 3% annually for inflation. This is your total estimated retirement cost, but you don't have to save this all on your own.
Unless you're stashing all your retirement savings in a savings account (which I would advise against), your money's probably going to grow over time. Depending on how you invest your money, it's possible to see a 7% to 8% annual rate of return over time. But you should use a 5% to 6% rate of return when calculating your investment growth, so your plans aren't derailed if your money doesn't grow as quickly as you'd expected. A retirement calculator will do this math for you and it can also factor in inflation for you, too. The final step is to subtract any free money you expect for retirement (more on that below) to figure out how much you must save on your own.
Seize every opportunity to earn free money for retirement
Social Security will be there for you when you retire, whether that's this year or in a few decades, and it can give you hundreds of thousands of dollars over the course of your retirement. This can go a long way toward reducing the retirement burden on you, but you need to understand the role you play in the size of your checks so you don't accidentally cost yourself benefits.
Your checks are based on your average monthly earnings during your 35 highest-earning years with adjustments for inflation. If you haven't worked for at least 35 years, you'll have to factor in some zeroes, which will weigh down your average, and if you've worked less than 10 years, you won't be eligible for Social Security at all.
The age you begin taking benefits also affects the size of your checks. If you want your full benefit, you must wait until your full retirement age (FRA) -- currently 66 or 67, depending on your birth year. You can begin as early as 62, but then you'll only get 70% of your scheduled benefit per check if your FRA is 67 or 75% if your FRA is 66. Delaying benefits past your FRA will increase benefits until you hit the maximum at 70. This is 124% of your scheduled benefit per check for an FRA of 67 or 132% for an FRA of 66.
Your employer might also offer free money toward your retirement in the form of a pension or 401(k) match. Always take advantage of any 401(k) match available to you unless you need all your income for basic living expenses. Try some of the tips below to lower your expenditures if this is the case. Watch out for your company's vesting schedule, too. This indicates when employer-matched funds are yours to keep and leaving before you're fully vested could cost you some or all of your 401(k) match.
Lower your costs, today and in retirement
Lowering your expenses today can free up more money to put toward your retirement savings. There are many approaches to doing this, including canceling services you no longer use, limiting discretionary spending, downsizing your home, or paying off debt. Take every penny you're saving and put it toward your retirement.
If you continue these money-saving strategies into retirement, you might also end up reducing the cost of your retirement. Cutting back on travel in retirement or delaying retirement by a few months or years can also help you narrow the gap between what you have and what you need. Delaying retirement is especially effective because it gives you more time to save while reducing the number of years your savings has to last.
Strive for more
In addition to lowering your expenses, look for ways to increase the money you have coming in. This might mean starting a side business or pursuing promotions at your existing job. This will help you by boosting the cash you have available for retirement as well as your average monthly earnings used to calculate your Social Security benefits.
Stay mindful of the retirement contribution limits every year. You may not need to max them out, though you can if you'd like. But avoid overcontributing because you'll incur a 6% penalty on the excess for every year it remains in your account.
You're allowed to contribute up to $6,000 to an IRA in 2019 and $19,000 to a 401(k). Adults 50 and older are allowed an additional $1,000 and $6,000, respectively, in catch-up contributions. These limits change periodically, so you may be able to contribute more in the coming years than you can today.
Keep at it
If you stick with the above strategies, you will definitely notice an increase in your retirement savings over time. Whether that's enough to cover your dream retirement depends on when you started, the lifestyle you want, and how much time you have until you exit the workforce. But a comfortable retirement where you don't have to worry about being able to afford basic living expenses could well be within reach.
