For many people, retirement is about finally setting your career aside and doing things that bring you the most joy or that you've always wanted to do. It should be one of the more carefree times in your life -- but unfortunately, it's hard for that to happen if you're constantly worrying about your finances.
According to the latest Transamerica Center for Retirement Studies survey, 37% of workers are concerned about outliving their retirement savings.
If you're part of that 37%, here's what you can do to be better prepared.
Have a good idea of how much you'll need
It's easier to plan for your retirement finances if you have a good idea of how much you'll need. There is no one-size-fits-all amount, because people's expenses in retirement will vary. There are, however, general rules you can follow to at least give you a baseline.
First, begin with the "80% rule," which says you should try to bring in 80% of your pre-retirement annual income in retirement to maintain your current lifestyle. In other words, if you're currently making $100,000 a year, you should aim to have $80,000 a year in retirement.
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Once you've determined the annual amount you'll need, use the "4% rule," which states that retirees can plan to withdraw 4% of their savings yearly for 30 years without worrying about outliving those savings. By multiplying your annual amount needed by 25, you'll get your "ideal" retirement savings amount. If your annual goal is $80,000, your savings goal would be $2 million.
It's also important to consider inflation when implementing the 4% rule. Ideally, you withdraw 4% in your first year, and then adjust the total in subsequent years based on inflation for the current year. So if you withdrew $80,000 your first year and inflation rose by 4%, you'd withdraw $83,200 the following year.
Adjust your 401(k) contributions
Not only do 401(k) plans help you save and invest for retirement, but they also lower your taxable income. At the minimum, the amount you should be contributing to your 401(k) is whatever percentage your employer will match -- and not a percent less.
The maximum amount you can contribute to a 401(k) plan in 2022 is $20,500 ($27,000 if you're 50 or older). While maxing out your 401(k) may not be feasible for everyone, a good rule should be to aim to increase your contributions by 1% each year. You likely won't miss 1% from your paycheck, but thanks to time and compound interest, 1% in your 401(k) can make a big difference.
If time isn't on your side and you're nearing retirement, get aggressive with trying to take advantage of the catch-up contribution allowed. It'll put away extra money, as well as lower your tax bill -- a win-win.
Use multiple retirement accounts
You should financially prepare for retirement from multiple angles. Retirement accounts like IRAs can be great supplements to other forms of retirement income like 401(k) payouts and Social Security. A traditional IRA allows you to deduct all or some of your contributions, depending on your income, whether you're covered by a retirement plan at work, and your filing status. Similar to a 401(k), traditional IRAs have required minimum distributions (RMDs) beginning at age 72. A Roth IRA doesn't have RMDs and allows you to contribute after-tax money and then take tax-free withdrawals in retirement.
The maximum amount you can contribute to an IRA -- both Roth and traditional combined -- is $6,000 a year ($7,000 if you're 50 or older). Which account you choose largely depends on your current versus projected tax bracket. If you're younger, you will likely want to take advantage of a Roth IRA because you can pay taxes on the front end while you're in a lower tax bracket and let the money grow and compound tax-free. If you're in the prime of your career and this is likely your highest tax bracket, consider a traditional IRA, because there's a chance you can deduct your contributions from your taxable income.
