Most Americans aren’t prepared for retirement.
While most non-retired adults have some type of nest egg,
only 36% think their retirement savings are on track, according to the Federal
Reserve.
A separate survey from the Insured Retirement Institute
found that most workers don’t have sufficient retirement savings and aren’t
putting enough aside to catch up.
It’s a problem that existed before the Covid-induced
recession. For some, the pandemic exacerbated the issue. One-third of Americans
who planned to retire say it will now happen later because of Covid and about
14 million stopped contributing to their retirement accounts every month as of
this March, according to a study from Age Wave and Edward Jones.
Yet others had an opportunity to put aside more money thanks
to the forced decrease in spending.
In fact, low-wage workers, many of whom don’t even have
access to retirement saving plans, have been hurt the most with layoffs, said
Anqi Chen, assistant director of savings research at Center for Retirement
Research at Boston College. They are also being left behind in the recovery.
“About half of workers at any given time in the last 40
years or so are not participating in a retirement account,” she said.
Yet saving for retirement is one of the most important
things you can do. Here’s how to get on track.
Start early and be consistent …
If you are young, the best thing you can do is start saving
for retirement early, since your savings will have the benefit of compound
interest.
Also, be consistent with your contributions.
If you open a Roth individual retirement account at the age
of 18, for example, contribute $100 a month for the next 40 years and assume a
12% annual average rate of return, you would end up with $1 million, according
to personal finance expert Suze Orman. If you wait 10 years to start, the end
result would be $300,000 by age 58.
…. But it’s not too late
If you did not start saving at a young age or had to stop
putting money aside during a time of financial stress, don’t be discouraged,
said certified financial planner Abbey Henderson, CEO of Concord,
Massachusetts-based Abaris Financial Group.
“My fear is that people will feel like, ‘I am behind. I will
never make it up, so I’m not going to try,’” Henderson said.
“Every little bit helps,” she said. “Take baby steps.”
So even if it is just $25 a week, do that. Once you are
comfortable and can go higher, do so.
Have the right asset allocation
Have the right mix of assets in your portfolio based on your
risk tolerance. Stocks, for instance, are riskier than bonds but give a higher
return. You may take on more risk when you are younger since your portfolio has
time to recover any losses.
It’s important to choose an asset allocation that will allow
you to sleep at night so that you aren’t panic selling when the market goes
down, Henderson said.
Steve Parrish, co-director of the New York Life Center for
Retirement Income, also suggests considering annuities as part of your overall
retirement strategy, since many companies no longer offer pensions. Annuities
offer a guaranteed income in retirement.
Don’t get caught up in the final number
Workers in the U.S. believe a median $500,000 is needed to
feel financially secure in retirement, a recent survey by the Transamerica
Center for Retirement Studies found.
Yet, the final number really depends on your specific
situation, such as your income and your living expenses.
Instead, think about saving 15% or 20% of your income in a
variety of vehicles, such as a 401(k) plan, savings account and 529 college
savings plan. That 20% can also include any employer match you get in your
401(k).
“So many things can change between now and retirement,”
Henderson said. “You can drive yourself crazy trying to target a certain number
in your 20s and 30s.”
Consider phased retirement
Instead of flat-out retiring, consider cutting back your
work hours to part-time.
“People are starting to say maybe it is a slow-down process
and eventually full retirement,” said Parrish, who pointed out that people are
living longer now.
That will also allow you to delay Social Security as long as
possible, so that when you do collect, the benefit will be higher.
Just be sure to pay attention to your employer benefits. If
you phase out too much, you may lose your health insurance. Medicare doesn’t
kick in until age 65.
Don’t forget about inflation
Don’t fall into the trap of not factoring inflation into
your retirement plans, Henderson said.
Have enough diversification in your portfolio, including
perhaps some real estate, inflation-adjusted Treasurys or commodities, and
stick with your program, she advised.
Also, remember that Social Security is your best hedge on
inflation, Parrish pointed out. A recent estimate puts the cost-of-living
adjustment for 2022 at 6.1%.
Of course, depending on your age, there is concern about the
program itself. The latest projections show that the fund will only be able to
pay full benefits as scheduled until 2033.
Envision your life in retirement
Think about what your golden years are going to look like.
“It is really important to have a vision of what retirement
is really going to be like because that is far more motivating,” Henderson
said. “It is really easy to reduce it to numbers and that is not exciting at
all.”
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