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Saving for retirement can be stressful, and it takes away money that you could use to do things you love today. But in the long run, it's worth it because this money will allow you to stay and pay your medical bills in retirement. Yet, despite the obvious importance of saving for retirement, more than one in five Americans still has no savings for retirement, according to Northwestern Mutual.
Even more worrying is the way some Americans plan to make up for their lack of savings. A recent Stash survey asked Americans about different retirement "strategies" and found that some people were banking on the following five approaches to retirement.
Source of the image: Getty Images.
1. Win the lottery
Surprisingly, 40% of Americans polled and 59% of Millennials said that winning the lottery was a reasonable way to retire. But this strategy presents major problems. First, there is the chance of winning. You have 1 chance out of 292,338 to win Powerball and the odds of winning Mega Millions are 1 in 302,575,350.
The average American spends $ 223.04 on the lottery each year, according to LendEDU. There is about 99.999999997% chance that you throw this money in the toilet. But if you invest in it instead, the chances of developing your money over time are much better. If you invested $ 223.04 a year for 40 years, your total contributions would be $ 8,923, but it would have increased to $ 44,535 with an annual rate of return of 7%.
There is also the fact that lottery winners are much more likely to go bankrupt within three to five years of their jackpot. If you do not know how to manage your money properly, there is a good chance that you will spend all your earnings well before reaching the retirement age.
2. Work part time in retirement
This is not a bad plan if you are approaching the retirement age and that your existing savings are not enough to make ends meet. But that's do not a good reason not to save for retirement during your youth. Nearly 40 percent of Americans end up retiring early, according to Boston College's Center for Retirement Research. If you have to retire before you are financially ready, you may run out of money to cover your basic living expenses.
People are forced to take early retirement for several reasons. Your condition may be degraded, making you unfit for work, or your spouse's health may be at risk and you may need to provide full-time care. You could lose your job and be unable to find a new one. In the end, you never know what will happen and you should not plan to work part-time at a late retirement.
3. Find a cheaper life abroad
Again, this strategy may work, but be realistic about why you want to live abroad. Is it really to reduce your living expenses or do you plan to travel around the world? Will you stay most of the time or will you make regular trips home to visit friends and family? Many trips could make life abroad much more expensive than staying where you are. You must also determine where you want to live abroad, because many countries are not much cheaper than the United States.
This plan could also be disrupted by unexpected events. If you become ill or if someone in your family gets sick and cares for you, it may be better to be closer to home. Retiring abroad is not a viable option for everyone and even if you plan to do it today, things might change by then.
4. According to the children
You have raised your children and offered them all their lives. By kindness of heart, they will reciprocate taking care of you in your old age if you need financial support. But they should not have to pay the price for your lack of planning and diligence.
Your adult children also try to save for their own financial goals, including retirement, home equity, or college education for their children. By asking them to support you, you could jeopardize their future financial security. Not to mention the fact that when you live at the expense of someone else, you have less weight in the way money is spent. Your children may be generous enough to put a roof over your head if you retire at retirement, but they will probably not be willing to pay for the trip around the world of your dreams.
5. Find a rich spouse
If you are lucky enough to find a rich spouse, it might work, but there is no guarantee that it will happen. Odds may not be as bad as winning the lottery, but it depends on what you consider "rich". Plus, nothing promises you to stay married until the end of your life, and if you divorce, you're back where you started, if not worse.
How to create a retirement plan that actually works
You might be lucky and one of the above plans might well end up, but you should not rely on that. Instead, create a real retirement plan based on your lifestyle and goals. Begin by estimating your life expectancy and subtracting your estimated retirement age to get a rough estimate of how long you are retiring. You may need to plan a longer life than you think. According to the Social Security Administration (SSA), a 65-year-old who is retiring today will live more than 90 years and one in seven will live more than 95 years.
Then add up your monthly living expenses estimated at retirement and multiply them by 12 to get your estimated annual expenses. Multiply this number by the number of years of your retirement, adding an annual inflation rate of 3%. A retirement calculator can do this and will ask you for your estimated annual rate of return. Use 5% to 6% to be cautious, but your investments may increase faster.
Finally, subtract the money that you expect to receive from Social Security, a pension or a 401 (k) equivalent of the employer. If you do not know how much you can expect from social security, create a my Security account that tells you how much you can expect based on your current work history, if you start Social Security at different ages. The amount remaining after subtracting your income from other sources is the amount you need to save on your own. Your retirement calculator should give you an idea of how much you need to save each month to reach your goal. Try to save at least as much, but if you can not, save as much as you can now and try to increase your savings by 1% of your salary each year.
In theory, all of the above pension plans could work, but the probability is low. You'd better stick to the proven method of creating a personalized plan and saving as much as possible each month.
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