While it's not a pleasant thought, the fact is that most people are not on track to retire comfortably. In fact, half of Americans aren't even saving enough to be able to cover basic necessities during retirement, according to a recent Fidelity survey.
However, hope is not lost. Fidelity estimates that 22% of retirement savers could make do with their retirement savings if they made modest changes to their retirement lifestyle. For 28% of the respondents, though, it would take significant lifestyle changes to make their income cover their basic expenses during retirement.
In other words, 50% of Americans will need to adjust their retirement lifestyles just to be able to live paycheck to paycheck during their golden years. That's not an ideal situation for anyone. Fortunately, if you adjust your savings plan early enough, you may be able to save enough money to get by in retirement without having to downsize your home and live on instant ramen noodles.
For example, say you have 20 years until retirement and you currently have $5,000 saved. Assuming you're earning a 7% annual rate of return on your investments, if you contribute $100 per month, you'd have $70,389 after 20 years. Stash away an extra $50 per month, and you'd bump your total savings up to $95,909 in the same time frame. Thanks to the power of compound interest, small additions to your savings can grow exponentially, so even a few extra dollars a month can amount to thousands of dollars over a few decades.
Now, it's one thing to say you're going to start saving more money, but it's another to do it. Unless you get a raise or win the lottery, you'll need to cut back in some spending areas so you can put more money toward your retirement fund. There are a few ways to make your money go further without forgoing that summer vacation or your daily latte.
1. Pay down high-interest debt
High-interest debt (such as credit card debt) is one of the most toxic forms of debt out there. If you have a high balance, you may end up paying thousands of dollars in interest, and it can take years to pay off that debt completely. And all that money you're spending on interest could instead go toward your retirement fund.
The average U.S. household that has credit card debt has a balance of close to $16,000, according to NerdWallet's 2017 American Household Credit Card Debt Study. Considering the fact that the average credit card APR is around 16%, the interest payments on that much debt can add up quickly. In fact, if you're paying $500 per month toward $16,000 worth of debt while paying 16% interest, you'll end up forking over more than $5,015 in interest alone over three and a half years. And the longer it takes you to pay down that debt, the more you'll pay in interest over time.
While it may seem contradictory, it may actually be a good idea in some situations to tackle debt before you put money toward your retirement. If the interest rate on your debt is higher than the returns you're earning on your savings (which it almost certainly would be in the case of credit card debt), then you'll get a better return on your money by paying off the debt ASAP.
Say, for instance, you have an extra $1,000 at the end of each month that you can either invest or put toward paying down debt. Let's also say you currently have $10,000 in a retirement fund earning 7% annually, but you're carrying $15,000 in debt with a 16% APR.
If you split that $1,000 and put $500 per month toward your retirement and $500 toward debt, you'd have $105,681 saved in your retirement fund after 10 years. You'd also have paid off your debt in about three years, paying a total of roughly $4,300 in interest. If you then invested the full $1,000 per month in your retirement fund for the next seven years, you'd finish that decade with $123,803.
If, however, you put $1,000 per month toward debt, you'd pay off that debt in just a year and a half, paying only $1,800 in interest. Then, after that debt was paid off, if you contributed $1,000 per month to your retirement fund, you'd have around $144,919 saved after eight years. Between the extra retirement savings and the money you save on interest, you'd come out roughly $21,000 ahead by paying off your debt first and then investing all your spare cash for retirement.
In other words, even if you hold off on saving for retirement for a couple years, you could end up with more in the long run by eliminating those high-interest payments on your debt.
2. Delay Social Security benefits by a few years
Of course, after you've been working the better part of your life, it makes sense to want to claim your benefits as early as possible. But by doing that, you could be leaving money on the table.
You can claim benefits as early as age 62, but when you claim before you reach your full retirement age (FRA), your benefits will be permanently cut by up to 30%. Wait until after you reach your FRA, though, and you'll receive a boost in benefits.
For example, say your FRA is 67, and your full benefit amount is $1,500 per month. If you claim benefits at 62, your checks will be cut by 30%, leaving you with $1,050 per month (or $12,600 per year). Delay benefits until age 70, though, and you'll receive a bonus of 24% -- bumping your total monthly check to $1,860 (or $22,320 per year).
Theoretically, your benefits should balance out eventually -- meaning whether you claim early or delay benefits by a few years, you should "break even" if you live to your life expectancy. In this scenario, here's what your breakeven age would look like:
|Age||Total Benefits When Claiming at 62||Total Benefits When Claiming at 70|
Now, it may look like a better decision to claim benefits earlier rather than later, since it will take until age 91 in this case to "break even" if you claim at age 70. However, life expectancies are continuing to rise. One in four seniors turning 65 today can expect to make it past age 90, according to the Social Security Administration, and one in 10 lives past 95. Especially considering the fact that your personal retirement savings could run dry by the time you reach this age, it will be helpful to have all the extra cash coming in that you can.
It's tough to plan for retirement, especially if you're on a tight budget. But even if your savings aren't quite where you want them to be, if you're strategic about it, you can make your money work harder for you.