It's a big misconception that living costs shrink a lot for most seniors. Sure, you might spend less on transportation if you no longer have a job you're required to commute to. And if you manage to pay off your mortgage ahead of retirement, that's another bill you'll manage to shed.
But all told, you should still expect to need around 70% to 80% of your former income once you retire. And Social Security will only provide about half of that, assuming you earn an average wage (if you're a higher earner, the program will provide even less replacement income). That also assumes no benefit cuts, which are a distinct possibility right now due to financial issues the program is anticipating.
So you'll really need to bring a decent chunk of savings with you into retirement. But new data from Vanguard reveals that 401(k) plan participants may not be socking away enough money to avoid a financial shortfall later in life.
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Is your 401(k) going to let you down?
In 2021, Vanguard 401(k) plan participants saved an average of 7.3% of their income for retirement. But in reality, most people should be socking away more like 15% to 20% of their income each year to ensure that they have enough money to live on once their careers wrap up. And so if your savings rate has been closer to 7.3%, it's time to ramp up.
Of course, that's easier said than done. But you have some relatively painless options for boosting your 401(k) contribution rate, such as:
- Automatically saving your annual raise
- Contributing enough to your retirement plan to snag your full employer match
- Switching jobs strategically to avoid leaving matching dollars on the table (such as in situations where there's a vesting schedule to follow)
- Getting a side job and earmarking your earnings for your retirement plan
- Saving windfalls that come your way, like bonuses, gifts, or tax refunds
In addition to these moves, you can (of course) try cutting back on spending. But that's something a lot of people struggle with. And the reality is that you may not need to go to the extreme of downsizing your home, getting rid of a car, and canceling all social engagements to boost your savings rate. You can instead work on cutting back to a reasonable extent (perhaps cutting the cord with cable, and dining out less frequently), all the while employing other tactics to make it possible to save more.
Don't shortchange your senior self
Many retirees end up needing more income than they expect. If you want to avoid a financial crunch in retirement, do your part to boost your 401(k) contribution rate.
You may not be able to sock away 15% to 20% of your earnings away for retirement just yet, and that's OK. But boosting your savings rate by even 1% from one year to the next could really make a big difference, and that might be a more reasonable goal to work toward.
