Here's Why Future Retirees Will Be More Financially Fragile Than Today's Seniors -- and What You Can Do About It

The future looks somewhat bleak for today's workers, many of whom aren't saving. The good news? We all have the power to change our fate.

Maurie Backman
Maurie Backman
Apr 14, 2018 at 6:04PM
Investment Planning

Retirees are often regarded as financially vulnerable. But while today's seniors certainly face their share of challenges, future seniors are even more likely to fall victim to money-related shocks. The reason? Workers today just plain aren't saving enough and don't know how to invest what limited savings they have.

Contributing to the problem is the fact that employee pensions have virtually become a thing of the past, thereby leaving workers themselves to shoulder the burden of amassing sustainable nest eggs and navigating investment risk. Throw in the fact that Social Security has been doing an increasingly poor job of keeping up with senior living expenses, and it's no wonder so many future retires are, in a word, screwed.

Older man frowning

IMAGE SOURCE: GETTY IMAGES.

But things don't have to be that way. If you're willing to prioritize retirement savings and invest your money wisely, you'll eliminate much of the risk that so many folks in your position face.

Salvaging your retirement

Retirees today face a number of budget-busting costs, from housing to food to healthcare. If you're concerned about having enough income in retirement, the answer is simple: Save more today. That's really the best thing you can do to protect yourself from some of the financial shocks or unknowns seniors tend to experience, from long-term care to losing their spouses.

How much should you be saving? Ideally, anywhere from 15% to 20% of each paycheck. If you can't swing that, do your best to get as close to that level as possible. Workers with access to a 401(k) get a great opportunity to sock away loads of cash in a tax-advantaged fashion. The current annual contribution limits are $18,500 for workers under 50 and $24,500 for those 50 and older.

If you don't have a 401(k) through your employer, your next best bet is an IRA. Though the annual contribution limits are significantly lower -- $5,500 for workers under 50 and $6,500 for those 50 and over -- if you begin saving in an IRA early on, you stand to accumulate a respectable sum.

In fact, imagine you're able to set aside $400 a month consistently from this point on, which is less than the amount you'd need to max out an IRA. The following table shows what ending balance you might be looking at depending on your total savings window:

If You Start Saving $400 a Month at Age:

Here's What You'll Have by Age 65 (Assumes an Average Annual 7% Return):

25

$958,000

30

$663,000

35

$453,000

40

$303,000

45

$197,000

TABLE AND CALCULATIONS BY AUTHOR.

As you can see, if you give yourself a 40-year savings window, you can turn a total of $192,000 in out-of-pocket contributions into an impressive $958,000. Cut that savings window in half, however, and you're looking at a far less substantial sum. In other words, if you're fairly young, take advantage by funding your retirement savings early. You won't regret it. And if you're older, save more each month. There's really no other choice.

Now let's talk about the 7% return we use in our example. That figure is actually a couple of points below the stock market's average, which means that if you load up on stocks during your investment window, you're likely to see the sort of gains outlined above. Play it too safe, however, and your savings won't grow nearly as much.

Let's imagine that instead of going heavy on stocks, you mostly stick to safer investments, like bonds. If that's the case, you might score just a 3% return on your money over time. In light of that, here's how the above totals might shake out:

If You Start Saving $400 a Month at Age:

Here's What You'll Have by Age 65 (Assumes an Average Annual 3% Return):

25

$362,000

30

$290,000

35

$228,000

40

$175,000

45

$129,000

TABLE AND CALCULATIONS BY AUTHOR.

These figures speak for themselves. Invest too conservatively, and you'll lose out on crucial income that could spell the difference between withstanding a financial shock or having it upend your world.

Now if you're not what we'll call the savviest of investors, fear not: You can actually invest in stocks without knowing much about them (though doing your research is always advisable). If you put your money into index funds, you won't have to worry about evaluating individual companies. Rather, you'll get a piece of the broader market, which will help mitigate some of the risks of stock investing. You can check out this list of 2018's top index funds if you're eager to go this route.

No matter what steps you take to prepare for retirement, don't make the mistake of procrastinating on savings or avoiding risk in your portfolio completely. Like it or not, it's on you to secure your financial future. The sooner you accept that, the better positioned you'll be to set yourself up for your golden years.