Does retirement seem like it’s ages away? Even if yours is several decades away, it’s never too early to start saving for it. The sooner you start, the better actually. Unfortunately, most Americans aren’t anywhere close to prepared for their retirement. The Employee Benefit Research Institute reported that 41 percent of households aged 55-64 have zero retirement savings. Zero, zilch, nada.
Think how stressful it would feel to be in your 60s and want to retire but be financially unable to, or to be basically forced into retirement by your employer or because of health issues without any financial cushion to fall back on.
Chances are high you’re not saving enough
For the minority of Americans who are actively saving for retirement, most of them aren’t saving enough. Less than 20 percent of households have saved more than four years of their annual income across all age groups. Four years of living expenses might sound like a lot if you only have a couple thousand dollars in your savings account, but the reality is that simply isn’t enough to live a long and comfortable retirement.
- The average retirement length in the U.S. is 18.8 years for men and 21.2 years for women that retire at age 65.
With life expectancies rising, more people wanting to retire well before they turn 65, and the future of Social Security up in the air, a heck of a lot of people could wind up completely broke when they should be ready to kick back and live it up.
Numbers really do matter
If you’re not that familiar with Social Security that’s okay, just be aware that it’s a broken system. The amount of benefits you could be eligible for is shrinking and you have to be older and older to get them. Age 65 used to be the magic number, but for those born in 1960 or later, full retirement age according to Social Security is delayed until age 67.
While two years of time may not be that big of a deal when you’re young and healthy, it can seem like an eternity in your 60s. Aging two years in your late 60s takes a much bigger toll on your body than it does in your 40s or 50s.
When it comes to collecting Social Security benefits, your age has a direct impact on how much you can collect. You don’t have to wait until you turn 67 to start receiving benefits, but you’ll collect a lot less if you don’t.
For example, at age 62 you’ll only receive 70% of what you could have received if you waited until age 67 to start collecting benefits. Those able to wait until age 63 would collect 75% of their benefits, which increases to 80% at age 64. The traditional retirement year of age 65 would yield 86.7% etc until reaching 100 percent at age 67.
Answer two key retirement savings questions
Two of your most important tasks in retirement planning are figuring out the answers to these two questions:
1) At what age do you hope to retire?
2) How much money do you want to have in retirement?
You should have already guessed that there are no one-size-fits-all answers to those questions because everyone has their own unique set of variables and circumstances. For example, here are several factors that can greatly impact your answers to the above two tasks:
- Where you live
- Number of dependents
- Current and expected income
- Cost of living expenses
- Healthcare costs*** (this is a big one)
- Cost of leisurely activities such as travel
- Life expectancy
Retirement Savings Goals By Age
Here are some suggestions to consider on retirement savings goals for each decade of your life until retirement.
- Focus on securing a job with a strong career trajectory with as many opportunities as possible for development, promotions, performance bonuses and raises.
- Be really careful that your early years of independent living are not spent piling up credit card debt.
- Start paying down your student loans.
- Open a retirement account asap. If your employer offers a 401(k) plan, take advantage of company matching.
- Try to keep your living expenses down by sharing the cost of rent with roommates. Utilize public transit whenever possible.
- Recognize that every little bit you save and contribute to a retirement account will make a big difference by your 60s. Compounding really works in your favor.
- Aim to accumulate 1-3 years worth of retirement living expenses.
- Put your career decisions from your 20s to good use and really maximize your 30s to bring home some extra bacon.
- Be careful not to let lifestyle inflation overtake your income growth.
- Always set a goal to pay yourself first and max out your 401(k) every year. Better yet, save even more that the annual 401(k) contribution limit in a separate investment account.
- You should already be a pro at distinguishing wants from needs. You might desire more living space to start a family, but can you really afford it? Do you really need a new car when your current one works just fine?
- Take good care of your body. Don’t let bad nutritional choices lead to a spare tire around your waist. Exercise at least a couple times a week and see your doctor for an annual physical checkup every year.
- Don’t lose sight of the long term. Aim to accumulate a total of 4-6 years worth of retirement living expenses.
- Take advantage of your seniority at work. By now you should have a better vision of when you plan to retire.
- Saving for retirement should be fully automatic for you at this point. You shouldn’t even have to think twice about maxing out your 401(k) and making additional contributions to your investment accounts.
- It’s time to really reassess your living expenses and compare how much they have changed since your 30s. Your ideal retirement location may have changed by this point too. Adjust your anticipated cost of living expenses in retirement accordingly.
- Update all of your income projections and look for more ways to save. Look for more ways to expand your passive income streams.
- Don’t let a mid-life crisis crush your finances. Nobody needs a shiny, new sports car or a closet full of LV handbags.
- Aim to accumulate an additional 6-7 years worth of retirement living expenses, totaling 10-13 years.
- It’s time to celebrate because you’re officially over the hill. You know all too well now that your body is slowing down. Regularly see your doctors for preventative care and health screenings.
- Listen to your doctors’ advice and think about how your current health conditions could impact you over the next 5, 10, 20, 30+ years. You may need to adjust your estimated healthcare costs in retirement.
- Really watch how much you’re spending each month. Start cutting back and aim to spend at least 10-20% less on average. That’ll make it easier to transition to spending 15-30% less each month once you retire.
- Review your investment portfolios and rebalance into more conservative investments.
- Look for more ways to reduce your taxable income and get a solid estate plan in place for the benefit of your heirs if you haven’t already.
- Maintaining a healthy lifestyle is more important than ever.
- Aim to accumulate an additional 8-9 years worth of retirement living expenses, totaling 18-22 years.
In addition, here’s a helpful chart with guidelines on how much net worth to have by income at various ages by Financial Samurai.
The more you can save over the course of your lifetime, the more options you’ll have for retirement. It’s much better to wind up with too much money versus too little, don’t you think? Life has a way of throwing unexpected curve balls at us, so the better prepared you are for retirement, the more magical it will be.
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The bottom line is the earlier you start, the better prepared you should be for the future!
Untemplaters, when did you start saving for retirement? Have you figured out when you want to retire and how much money you want to have saved by then? What are your short-term and long-term retirement savings goals?