After working hard all your life, the last thing you want to do is find yourself cash-strapped in retirement. But if you're not careful, that could be the reality you inevitably wind up facing. Here are a few reasons why you might struggle financially during your golden years -- and what to do about them.
1. You wait too long to start saving
Most of us can't afford to part with huge chunks of our income on a regular basis. As such, setting aside $200 or $300 a month for retirement is actually pretty respectable, and if you start saving early enough in life, you'll give your money plenty of time to grow into a larger sum. On the other hand, if you wait too long to start setting money aside for the future, you'll see far less growth on your savings, which could lead to a shortfall later on.
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Check out the following table, which shows what a monthly retirement plan contribution of $300 might turn into over time:
|
If You Start Saving $300 a Month at Age: |
Here's What You'll Have by Age 67 (Assumes a 7% Average Annual Return): |
|---|---|
|
22 |
$1.03 million |
|
27 |
$719,000 |
|
32 |
$498,000 |
|
37 |
$340,000 |
|
42 |
$228,000 |
|
47 |
$147,000 |
Data source: AUTHOR.
If you begin saving that money at the start of your career, you stand to retire with around $1 million. But if you wait until your late 40s to start socking a modest amount of money away, you'll wind up with much less. In our example, saving $300 a month over a 20-year timeframe results in $147,000 in savings, but that's not a whole lot over what could be a 30-year retirement. If you want to avoid money problems later in life, start saving when your career kicks off, or shortly thereafter.
2. You decide to rely on Social Security for most of your income
Many workers neglect their retirement savings because they plan to fall back on Social Security once retired. That logic, however, might leave you with a serious income shortfall on your hands. That's because Social Security is only designed to replace about 40% of the average worker's pre-retirement income. Most seniors, however, need roughly twice that amount to live comfortably.
In fact, the average Social Security recipient today collects just $1,461 a month, or $17,532 a year. If that doesn't sound like a whole lot of money to live on (which it shouldn't), then you'll need to build savings of your own, even if it means cutting back on expenses at present to free up cash to sock away for the future.
3. You don't downgrade your lifestyle when your income drops
Many seniors carry their pre-retirement expenses into their golden years. But once you move over to a fixed income, you may not have the ability to maintain the lifestyle you once enjoyed, and if you don't start making adjustments early on, you might spend down your nest egg quickly, thereby leaving yourself cash-strapped a few years down the line.
Rather than assume that you can keep up the lifestyle you're used to, map out a retirement budget based on the actual income you have available (think withdrawals from your IRA or 401(k), Social Security, and any other income source at your disposal) and see what it allows for. It may be that you can't retain a large house with high property taxes and also take three nice vacations a year, but you can do one or the other. Decide what's most important to you and allocate your limited income to the things that matter most -- but don't spend your money recklessly and assume it won't hurt you eventually.
The last thing you want to do is find yourself perpetually scrambling for cash during your golden years. To avoid that fate, start saving early on, understand the role Social Security will play in your retirement, and adjust your spending to avoid prematurely depleting your cash reserves. With any luck, you won't end up struggling financially like so many seniors unfortunately do.
