When it is time to save for retirement, many workers can indulge in a false sense of security.
According to a study by the US Federal Reserve, about 13% of workers over 60 do not have the least reserve for their retirement, but 45% of workers in this age group think they are about to take a comfortable retirement. In addition, among workers aged 45 to 59, only 27% saved $ 250,000 or more – although 42% think they are on the right track.
A quarter of a million dollars may seem like a lot of money, but if you withdraw, say, $ 30,000 a year, those savings will only last about eight years. If you think you are on the right track when in reality your savings will not last more than a few years, you may be preparing for financial failure. After a few years of retirement, you may find that your savings are starting to dry up. It is then too late to return to work and increase your retirement income.
If you run out of money in retirement, you will probably end up depending on Social Security benefits to make ends meet. A survey by the Nationwide Retirement Institute found that just over half of recent retirees report that their benefits are their main source of income, while only 11% say most of their income comes from their personal savings. However, the average social security recipient receives only about $ 1,400 a month, which will probably not be enough to live on. If you feel like you can go through retirement without saving anything, you risk a rude awakening.
So, how do you avoid the risk of a financial disaster during retirement? The key is to do your homework and make sure you have a realistic idea of the amount you need in savings to last the rest of your life.
Determine your retirement needs
In order to determine if you are on the right track for a comfortable retirement, you must first determine what you want to save. The best way to do this is to plug your information into a retirement calculator. Keep in mind, however, that different calculators take your results into account differently (for example, some factors take into account the benefits of social security and the effects of inflation, while others do not ). It may therefore be advisable for a few different calculators to receive a range of results.
When you enter your information in the calculator, be as honest and accurate as possible. For example, many calculators will ask you how many years you plan to retire. The Social Security Administration estimates that the average life expectancy is about 85 years old, but one-third of today's retirees can expect to live beyond age 90. It would be wise to be cautious and think that you will spend more. retirement time that you think.
Also, consider how much you plan to spend each year in retirement compared to what you are spending now. For many retirees, expenses will decrease once they leave their jobs. But this is not always the case, and if you have a long list of years of retirement filled with expensive travel and activities, you may need more each year than you currently do. Being honest with yourself when calculating your retirement needs will help you to be as financially prepared as possible.
Finally, do not forget how social security benefits will affect your savings – and how the age at which you apply affects the amount you receive. Some calculators incorporate social security benefits, giving you a better idea of what you need to save on your own. But the age you claim will affect the size of your checks. The only way to receive the full amount of your benefits is to request payment at your retirement age (FRA). You will receive less each month if you apply before your FRA and if you wait after that age (up to age 70), you will receive slightly larger checks. If you plan on retiring and claiming benefits at the age of 62, for example, these small social security checks can potentially ruin your plans if you do not prepare for them.
How to catch up if you are off track
Many retirement calculators will tell you not only how much you need to save when you retire, but how much you should save each month to reach your goal. It's easier to know if you're on the right track – and if you're late, how much you'll need to start saving to catch up.
If you find that your savings are late, try to make corrections as soon as you can. The sooner you start saving, the less you need to save every month to reach your goal, thanks to the power of capitalization. If you wait a few years or even ten years for your retirement, you may need to save thousands of dollars every month to catch up. Start early, though, and you may only need to save a few hundred dollars a month to reach your goal.
Once you know how much you should save each month, you may need to make budget adjustments to find the money. Depending on your delay, you may need to make minor changes or major sacrifices. Sometimes reducing one or two relatively small expenses is enough to reach your monthly savings goal. If you are seriously late, you may need to consider a part time job or even reduce the size of your home in order to find extra money for retirement.
If you are late on your savings, it is not the end of the world. The most important thing is to realize that you are late and start making adjustments to get back on track. You do not know what you do not know, but if you do your research and find out exactly what you need to save for retirement and create an action plan to get there, you'll be much better prepared for the future.