Every American needs to work on preparing for retirement, as Social Security alone isn't enough to live on, so you'll need savings to supplement it. Unfortunately, a shocking number of people haven't taken one of the most basic steps in getting ready for life after leaving the working world.
Without taking this first step, it becomes much more difficult to build the nest egg you need to support yourself during your later years. Fortunately, it's an easy process if you know where to begin.
Millions of Americans haven't yet made this simple retirement planning move
According to the November 2021 Compendium of Findings About the Retirement Outlook of U.S. Workers prepared by the Transamerica Center for Retirement Studies, a whopping 24% of workers do not have any type of retirement strategy. Part-time workers are more likely to be among this group, but some full-time workers are also lacking a plan.
This doesn't just mean they don't have a written strategy. In fact, having a written plan is uncommon, with just 33% of all workers indicating they've written down a roadmap to lead them to a secure retirement. This 24% of employees have no plan at all for how they will support themselves after their paychecks stop coming.
This can be a huge problem, since Social Security replaces only 40% of preretirement earnings. That's not even close to enough money to cover the necessities or maintain your standard of living after an employer stops providing you with income.
How can you create a retirement strategy?
If you want to make certain you're financially prepared for a comfortable retirement, ideally you won't just join the 76% of workers with some type of retirement plan. Instead, you'll be part of the one-third who actually have a written plan.
The good news is, it's really not that hard to create one. To develop a retirement strategy:
- Think about how old you'd like to be when you retire. Don't be too overly optimistic about how long you'll work, as planning to stay on the job until very late in life is probably not going to happen for most people. And overestimating how long you'll keep getting a paycheck could create all kinds of financial problems.
- Estimate how large your retirement nest egg should be. There are several ways to do this. The simplest is to figure out what your salary will be when you leave the workforce (by starting with your current salary and assuming a 2% raise each year until your chosen retirement age). Once you know your final salary, multiply by 10 and assume that's how much you'll need saved. So if you expect to be earning $70,000 upon retiring, you'd need $700,000.
- Using a calculator to break your big goals down into small ones. Investor.gov has calculators that can tell you exactly how much to save based on your target retirement date, savings goal, current amount invested, and projected future returns.
- Budget to save and invest enough each month. After figuring out your monthly savings goal, work on your budget to ensure you have enough to invest. Automatically transfer the money into a tax-advantaged retirement plan, and pick a good range of different investments. Exchange-traded funds (ETFs) can make this easy if you aren't sure how to pick individual stocks.
By simply taking these four steps and writing down your plan for how much to invest and what to invest in, you can go a long way toward making sure you're ready to support yourself once your paychecks come to an end.