Funding your retirement can be tough. Of course, you'll probably have Social Security benefits coming in, but those benefits only replace about 40% of pre-retirement income and are nowhere near enough to live on.
When Social Security was created, the idea was to have a three-legged stool made up of those benefits, your pension from your employer, and savings. Today, though, most people don't have pensions, so two legs have to support you throughout your later years -- Social Security and savings alone.
Unfortunately, many people have a serious savings shortfall and are at risk of financial hardship. Here's what to do to avoid being one of them.
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Far too many Americans have a retirement savings shortfall
According to recent research from The Motley Fool, 47% of working-age households risk not having enough money saved in their retirement plans. That's based on an assumption that current employees will work until age 65.
Unfortunately, most Americans are well aware of this problem, with 79% reporting in 2024 that the country is facing a retirement crisis.
And this problem extends across all income levels, with 56% of lower-income working adults, 45% of middle-income working adults, and 41% of high-income workers all in danger of falling short on retirement savings.
Here's what you can do to avoid a retirement shortfall
If you don't want to be one of the many Americans who end up without enough money in your 401(k), you need to take a few key steps to avoid a retirement savings shortfall.
Here's what you should do:
- Set a clear retirement savings goal: It's really hard to save enough for retirement if you don't know how much enough is. Think carefully about how big your nest egg needs to be, taking into account inflation, taxes, and future healthcare costs. Saving 10 times your final salary is a good rule of thumb, but you may need more if you want to live in a high-cost-of-living area or anticipate retiring early.
- Choose the right kind of retirement account: It makes sense to contribute enough to earn your full 401(k) match if your employer offers one. Beyond that, you may want to put some money into a traditional or Roth IRA to access more investment choices. Traditional accounts tend to be better if you think your tax rate is higher now than it will be in retirement, while the reverse is true for Roth accounts.
- Set up automatic contributions. Once you know exactly how much you need to save for retirement, set that amount up to be automatically invested into your retirement accounts. This is a key part of the retirement planning process as it makes saving the status quo and maximizes the chances you'll be able to hit your target since the money moves into the correct account by default.
- Make smart investments. You'll want to buy assets that expose you to an appropriate amount of risk and maximize your potential returns. ETFs, and especially those tracking the market as a whole, can be a good option, as can target date funds if you aren't sure how to allocate your assets. Just be sure to watch for investment fees as they can really eat into your returns when you're investing over the long term.
- Increase investments as your income goes up. If you struggle to invest enough to hit your target from the start, you should aim to devote most or all of your raises to retirement investment until you're on track. For example, if you can only afford to invest 10% of your income to start, then when you get a 2% raise, bump that amount up right away before you get used to having the extra funds.
By following these five steps, you can reduce the chances of ending up one of the millions of Americans who have too little saved to have a secure future.
