Why You're Less Prepared for Retirement Than You Think – The Fool Motley

It is no secret that the retirement plans of many workers are not on the right track. According to a report from the Federal Reserve Bank, more than half (56%) of Americans over the age of 30 have no savings for retirement, and among the workers without savings, about one in ten is 60 or older. more.

Do not keep anything for retirement is dangerous, but if you know you're late, you can make corrections quickly to start saving more. What is more disturbing is the idea that you may be thinking about being ready for retirement while this is not the case. If you think you are on track to have enough savings for the future, you probably will not even realize that you are not adequately prepared before reaching retirement – it is then too late to make corrections.

According to the Fed's report, 42% of future retirees, aged 45 to 59, say their retirement savings are on track. This sounds like good news, but this scenario poses two problems. First, when asked what amount they considered "on track" for retirement, the answer was $ 250,000. Second, despite the fact that nearly half of these workers say they are on the right track, only 27% have actually saved $ 250,000 or more for retirement.

A quarter of a million dollars is a lot of money, but it is probably not enough to last until retirement – even with Social Security benefits that cushion your money. savings. Retirement may cost more than you think, and if you do not prepare accordingly, this could cause a shock of the sticker.

How much does retirement cost

The money you will need to save for retirement depends on many factors – such as your retirement lifestyle and your overall health – and each will have a slightly different retirement number. In general, however, you need more than you think.

The average person aged 65 and over spends about $ 46,000 a year, according to the US Bureau of Labor Statistics. If you plan to spend so much money each year on retirement, you need to save about $ 1.15 million when you retire. This number is based on the 4% rule, which explains, in a nutshell, that you can withdraw 4% of your pension fund during the first year of retirement, and then adjust your withdrawals each year based on the amount of your pension. ;inflation. So in this scenario, 4% of $ 1.15 million equals $ 46,000. To work backwards, multiply $ 46,000 by 25 and calculate a result of $ 1.15 million.

Of course, these figures do not take into account social security benefits. The average social security check stands at about $ 1,400 a month, or $ 16,800 a year, according to the Social Security Administration. If your total annual expenditure is $ 46,000 and $ 16,800 comes from Social Security, it means that only $ 29,200 must come from your own savings. To determine how much you need to save when you retire, multiply this number by 25 to obtain a result of $ 730,000.

It's still a lot of money, and it's almost three times more than those who think they're on the right track have saved. If you want to save a quarter of a million dollars with retirement and suddenly realize that you will need three times more to live comfortably, apart from winning the lottery or inheriting a small fortune, you can only not do much. bridging the gap.

Prepare the future one step at a time

The best way to prepare for retirement is to research and determine how much you need to save to make your money last the rest of your life. Do not just go there and hope for the best.

Start by creating a retirement budget to determine how much you plan to spend each year. You may end up spending more or less than now, so take the time to think about how your retirement expenses will compare to your current lifestyle. Do not forget the health expenses during this stage either. Medicare will cover many things, but not everything. Be prepared to pay a portion of your savings for health care.

Then use your budget to calculate your retirement number. You can do this manually using the 4% rule or plug your information into a retirement calculator. Your results may be different for each calculation, and it does not matter. In fact, it's a good idea to use multiple retirement calculators to get a range of results because each calculator can use slightly different entries to determine your retirement number. When in doubt, aim to save more – it is never bad to have more money than needed. Most calculators tell you how much you need to save each month to reach your goal based on the age of retirement.

Once you have this number, make a plan of economy. If you have a 401 (k) group sponsored by your company that offers matching contributions from your employer, take full advantage of it. These matching contributions can double your savings. This is a simple way to save more with minimal effort. Do not give up that free money!

If you're struggling to find enough money to reach your monthly savings goal, review your budget and see if there are areas where you can reduce your costs. Even saving a few dollars in each expense category can add up to a hundred dollars more per month, which can greatly contribute to the preparation of retirement.

If, after spending a fine comb in your budget, you still can not save, you have two options: find a way to earn more money now for retirement or rethink your retirement expectations. You may have to work a few more years than expected, or you may have less expense every year in retirement than you would have hoped. That's fine, but it's important to be honest with yourself about your expectations so as not to be caught off guard when retirement approaches.

Retirement planning is not an easy task. Simply save on what you can and hope that everything will be fine or it will not work in your favor. But the more you have a clear idea of ​​what it takes to retire comfortably, the more you will be prepared.