Adults age 25 to 34 are doing the best job of saving for retirement, but even among this group, only about 27% are on track for their goals, according to a recent Ascensus survey. Among those adults on the cusp of retirement (age 55 to 64), fewer than 20% were on track to hit their retirement savings goals, an alarming figure for the generation with the least time to save. People younger than 25 have the most work to do but the most time to do it, with 96% falling short of their retirement goals.
If these statistics don't trouble you, then perhaps their consequences will. If you're not on track for your retirement goals, you could end up struggling to pay your bills in your final years. You could lose your home, not be able to afford medical care or suffer from having a generally lower quality of life than you're accustomed to. You might even need to rely on your children to support you, if you have any, which could inhibit their ability to save for their own retirement.
You can help yourself avoid this fate by outlining a clear retirement savings plan and setting aside part of your money each pay period. Below, I'll discuss how to set a retirement savings goal and what to do if you're not reasonably prepared for life after work.
How to set your retirement savings goal
Figuring out how much you need to save for retirement is challenging because there's no way to predict it with absolute certainty. You can't know how well your investments will do, how long you will live, or what taxes will look like in the future. All you can do is make educated guesses.
Step one: decide when you want to retire and how long you expect to live. This will determine how many years of income you need to have saved up. Your retirement age is a personal preference, but how long you live is not (although you can alter your lifestyle to help you live longer.) The average American can expect to live about 78.6 years, but you may live longer than this or not as long, depending on your gender, genes, and lifestyle habits. Subtract your estimated life expectancy from your retirement age to figure out how many years of retirement you must plan to save for.
Next, you must estimate your living expenses in retirement. While some expenses, like raising children and saving for retirement, will go away, other expenses, like healthcare, will probably increase. Don't forget that you'll still need to pay taxes and studies show older people encounter surprise medical costs at a high rate. Count up all your expected, and factor in a cushion for the unexpected, monthly costs during retirement. Multiply this monthly estimate by 12 to find your annual living expenses. To determine your living expenses in successive years, you must factor in inflation. You can use 3% per year as an estimate for this.So if you estimate $40,000 for your living expenses in the first year of your retirement, then you would need $41,200 for the next year, and so on. If you don't want to do all this math by hand, you can use a retirement calculator instead.
Once you've figured out how much you need to see you through your retirement, subtract the money you expect to receive from Social Security, pensions, or an employer 401(k) match. You can estimate how much you'll receive from Social Security by creating a my Social Security account. The amount left over after you subtract these contributions is the amount that you have to save on your own during your working years.
It's worth noting that you don't have to save that exact amount dollar for dollar, because you'll also have compound interest working in your favor. It's possible that your investments could return up to 8%, but a 5% rate of return is a better estimate if you're trying to be conservative. Use a compound interest calculator to help you estimate how much your current savings could grow and then play around with different contribution amounts until you find the amount that will enable you to hit your retirement goal, realistically.
What to do if you're not on track for retirement
If you realize you're not on track for your retirement, don't worry. There is still time to make adjustments, no matter your age.
The first step is to boost your retirement contributions as much as possible. You may have to make some adjustments in order to make this happen -- by cutting spending or working some overtime, for example. Alternatively, you could delay your planned retirement by a few years in order to decrease the amount that you need to save. Consult with a financial advisor if you're having trouble finding a solution that works for you.
Your 401(k) is a great place to begin saving, especially if your employer matches some of your contributions. You're allowed to contribute up to $18,500 to a 401(k) in 2018, or $24,500 if you're over 50. In 2019, these limits will increase to $19,000 and $25,000, respectively.
An IRA is also an option, but the contribution limits are lower. You're only allowed to put up to $5,500 in an IRA in 2018, or $6,500 if you're 50 or older. These limits will also rise, to $6,000 and $7,000, respectively, in 2019.
Whether you believe you're on track for your retirement goals or not, it's a good idea to redo your calculations every few years. If you find that you're off track, it will be easier to make small adjustments now than to figure out how to cut costs in retirement when you're faced with a half-empty nest egg.