The traditional view of a work-free retirement is fast
becoming a relic of prior generations. In the 2022 Retirement Confidence Survey
by Employee Benefit Research Institute (EBRI), 70% of workers expected their
paychecks to be a source of retirement income.
The benefits of continuing to work are clear. You can keep
contributing to your retirement account as you delay your retirement
contributions. Working longer may also allow you to put off collecting Social
Security -- which will give you a higher benefit later.
Retirees' experiences different from workers'
expectations
Unfortunately, working deep into your retirement years may
not be a realistic plan.
The same EBRI survey asked retirees to weigh in on their
experiences with work in retirement. More than three-quarters of retirees (78%)
said they weren't using work as a source of income. Further, 47% of retirees
admitted to retiring earlier than expected. Of that group, a large majority
linked their early retirement to circumstances outside their control.
Specifically:
32% retired earlier due to illness
33% retired earlier due to corporate downsizing or
restructuring
13% retired earlier to care for a spouse or family member
7% retired earlier because their skills no longer matched
their jobs
Here's the takeaway; A retirement plan that relies on your
paycheck may expose you to the worst of financial surprises. As the data
indicates, seniors commonly retire earlier than they would like. If that
happens to you and you're not prepared financially, your early retirement could
come with a major lifestyle downgrade.
Backup your finances with higher savings contributions
Saving and investing more are often the best moves you can
make to protect against an earlier-than-planned retirement. If you have a
workplace 401(k), take advantage of high contribution limits and catch-up
contributions if you're eligible.
This year, you can contribute up to $20,500 to a 401(k). The
IRS additionally allows for $6,500 in catch-up contributions if you turn 50
before year-end.
Making use of those catch-up contributions can significantly
increase your savings balance at retirement. Say you invest the full catch-up
amount of $6,500 annually between the ages of 50 and 65. Assuming your return
is a market-average 7%, those contributions will grow to about $160,000.
You can also stash more money in a health savings account
(HSA) if you're eligible. For everyone under age 50, 2022 HSA contributions are
capped at $3,650 when you have self-only, high-deductible health insurance. If
you have family coverage on a high-deductible health plan, your contribution
limit is $7,300 for the year. In the year you turn 50, you can add $1,000 to
those limits.
Reduce debt and build cash
Reducing high-rate debt and building your cash reserves will
also strengthen your finances. You'll want to pay down your high-rate debt
before retiring, anyway. Doing it now frees up cash to fund higher retirement
contributions.
Ample cash savings gives you the flexibility to manage
through all kinds of unexpected circumstances. Say you do get laid off in your
late 50s. You could use your cash on hand to pay the bills temporarily as you
explore the job market and/or rework your retirement funding plan. Without
sufficient cash reserves, your only option may be to start your 401(k)
retirement distributions immediately.
Hope for the best and plan for the worst
In personal finance, it's always smart to consider the
worst-case scenario. With respect to retirement, that worst case could be
losing your paycheck five or 10 years earlier than you'd planned.
Raising your retirement contributions now is usually the
best defense against a forced early retirement. Paying down high-rate debt and
increasing your cash savings are also smart moves. You're not likely to regret
any of these steps, either. Even if you end up working as long as you'd like,
rock-solid finances are always good to have.
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