After a year as erratic and depleting as 2020 has been, it might surprise you to hear that workers are significantly more confident in their ability to retire now than they were early on in the pandemic. The number of workers who felt somewhat or very confident in their ability to save enough for a comfortable retirement jumped from 45% in the second quarter of 2020 to 54% in the third quarter, according to a recent Principal survey.
That's great news, but it still means that close to half of all Americans doubt their ability to save enough for retirement. If you're one of them, here are some tips to close the gap between what you have and what you need.
Create a retirement plan
It's natural to feel unprepared for retirement when you don't know how much you actually need to save. So creating a retirement plan is the first thing you should do to improve your retirement readiness if you haven't already. To estimate how much you must save, you'll need estimates of your life expectancy, your annual expenditures in retirement, and how much you'll get from Social Security, a 401(k) match, and other sources. A retirement calculator can help you use these estimates to determine how much to save monthly to reach your goal.
If you're not able to save as much as you'd like right now, try altering your retirement plan until you find a solution that works. Delaying retirement is an easy way to correct a savings shortfall because it gives you more time to save while reducing the length of your retirement and allowing your existing investments to grow for longer before you start drawing upon them.
Choose the right retirement account
Once you know how much you must save, you have to decide where to keep your money. If you don't have access to a retirement account through your workplace, you may have no other choice but to save in an IRA. These accounts give you a lot of flexibility for investments, which can help keep costs low. But you're limited to a maximum contribution of $6,000 per year in 2020 and 2021, or $7,000 if you're 50 or older.
If you have a 401(k) through your job, you can save a lot more: up to $19,500 per year in 2020 and 2021 or $26,000 if you're 50 or older. Plus, your company may match some of your contributions, essentially giving you a bonus for preparing for your future. You should definitely take advantage of this match unless you need all your money to cover your essential expenses right now, because there's no getting it back once it's gone. The downside to 401(k)s is your investment options are usually limited, which could force you to pay more in fees than you'd like. That's something to weigh if your company doesn't offer a match.
You may also have to choose between tax-deferred and Roth retirement accounts. Tax-deferred contributions give you a tax break this year, but you pay taxes on your distributions. These accounts are best if you think you're in a higher tax bracket now than when you retire. Roth retirement contributions don't reduce your taxable income, but you won't pay any taxes when you withdraw the funds later in retirement. Consider one of these accounts if you believe you're in the same or a lower tax bracket than when you retire.
Review your plan annually
Your plans for your senior years will probably change between now and retirement. Your investments may grow more quickly or slowly than you anticipated or you might discover a new hobby that changes how you want to spend your retirement. Updating your plan annually is key to ensuring these changes don't hurt your financial security.
Crunch the numbers again to see if you're still on track for your goals. If you're a little behind, try to increase your monthly savings rate. You may have to make some changes to your budget, like reducing discretionary purchases or starting a side job. If you're ahead of where you expected to be, you can either decide whether to reduce your monthly savings rate to give yourself more money now, or think about moving up your retirement date.
Retirement planning isn't a one-time activity. Following the first two steps above is a good start, but if you truly want to feel confident in your ability to retire comfortably, you can't ignore the third step. Only by checking in with yourself routinely can you truly be sure that you're on track for the retirement you want.