Study after study has painted a grim picture of retirement for today's workers. Many are well behind where they should be in terms of savings, and an alarming 21% of Americans have no retirement savings at all, according to a Northwestern Mutual survey. Couple that with the potential for a long life expectancy and the uncertainty surrounding Social Security's future, and things look dire indeed.
But a recent Employee Benefit Research Institute (EBRI) study suggests there may be a light at the end of the tunnel. The latest data from its Retirement Security Projection Model shows that the percentage of Americans estimated to run out of money in retirement has decreased by 1.7% since the last time EBRI conducted this study, in 2014. But the danger is still real for many Americans. Below I discuss the study's findings in more detail and what you can do if your retirement savings are off track.
Two in five Americans still aren't saving enough for retirement
While retirement savings have improved slightly over the last five years, 40.6% of American households with heads of households aged 35 to 64 will run out of money in retirement, according to the EBRI study. And this could get worse.
The Social Security trust funds will be depleted by 2034, at which point Social Security will no longer be able to provide everyone who qualifies their full benefits. The government has considered several options to save the program, including reducing benefits, increasing the Social Security tax rate, reducing cost-of-living adjustments, and raising the full retirement age. No one knows what will happen yet, but it's possible that Social Security's value will decline.
If that happens, the EBRI study predicts that the percentage of Americans at risk of running out of retirement savings could rise by as much as 17% for adults aged 35 to 39, and the aggregate retirement deficit for all ages included in the study will rise by 6%. Unfortunately, there isn't anything you can do about the future of Social Security, but you can take steps now to improve your personal retirement savings.
How to get your retirement savings back on track
The first step is to estimate how much money you'll need for retirement, if you haven't already. First, estimate how long you're going to live. The average life expectancy in the U.S. is 78.6 years, but you may want to plan for longer. One in four of today's 65-year-olds will live past 90, according to the Social Security Administration, and one in 10 will live past 95. Once you have your estimated life expectancy, subtract the age you plan to retire at to determine the length of your retirement.
Then estimate your living expenses for one year of retirement, keeping in mind that some expenses, like child care and retirement savings, will go away, while others, like healthcare, may rise. Multiply this number by the number of years of your planned retirement, adding 3% each year for inflation. A retirement calculator can help with this. Finally, subtract any employer-matched retirement funds and any money you expect to get from Social Security to determine how much you must save on your own. You can create a my Social Security account to figure out your estimated Social Security benefit.
Once you know how much you need to save for retirement, look for ways to close the gap between what you have and what you need. Contribute to your 401(k) if you're not already, and boost your contributions if you can. You should contribute at least enough to get your full employer match unless you absolutely can't afford it. It's free money, after all. If your employer doesn't offer a 401(k), open an IRA instead. You can contribute up to $19,000 to a 401(k) in 2019 and $6,000 to an IRA. Adults 50 and older may contribute an extra $6,000 to a 401(k) and $1,000 to an IRA.
You may also consider working longer or working part-time in retirement. Both strategies help reduce how much money you need in retirement, and they could increase your Social Security checks. Your Social Security benefit is based on your average monthly earnings during your 35 highest-earning years. If you make more money in the later years of your life, your lower-earning years will drop off and your benefit will grow.
Another way to increase your Social Security checks is to delay benefits. You can start taking Social Security at 62, but you'll only receive 70% or 75% of your full benefit amount per check if you start then, depending on if your full retirement age is 67 or 66, respectively. This amount climbs for every month you delay Social Security beyond this point. It reaches 100% at your full retirement age and the maximum benefit at age 70. This is 124% of your scheduled benefit if your full retirement age is 67 or 132% if your full retirement age is 66.
It's easy to fall into the trap of thinking you have plenty of time to save for retirement, but the longer you wait to begin making changes, the more difficult it will be. Try some of the above tips or talk to a financial advisor if you want personalized advice for your situation.