Retirement can be a daunting prospect, since it generally involves moving from a steady paycheck to a fixed income. Unfortunately, the overwhelming majority of Americans lack financial confidence with regard to that milestone.
Only 27% of U.S. adults are very confident about their ability to maintain financial stability in retirement, according to TIAA's 2019 Lifetime Income Survey. If you're not one of them, here are three important things to do today.
1. Know what to expect from Social Security
Many people worry about their finances in retirement because they're aware that Social Security is facing financial difficulties that could result in benefits being cut. Clearly, that's not good news. But rather than get hung up on a potential decline in benefits, understand that Social Security was never designed to get you through retirement by itself in the first place. In a best-case scenario -- meaning, no cuts in benefits -- it will replace about 40% of your previous income, assuming you're an average earner. Most seniors, however, need close to double that amount to maintain the same lifestyle they get used to during their working years, which means you need a backup plan no matter what.
That said, you can get a sense of what Social Security will pay you by reviewing your earnings statements annually. Those statements contain an estimate of what your benefits will look like in retirement, though keep in mind that several factors will impact their accuracy, such as your future earnings (especially if you still have many working years ahead of you) and whether the aforementioned cuts in benefits come to be.
2. Max out your retirement plan contributions
Since Social Security should only provide a portion of your retirement income, the rest will need to come from you. To this end, you can help yourself by aggressively funding a tax-advantaged savings plan, like an IRA or 401(k), for the remainder of your career. Currently, you can contribute up to $6,000 annually to an IRA if you're under 50 or $7,000 if you're 50 or older. With a 401(k), the annual limits are much higher -- $19,000 for those under 50, and $25,000 for the 50-and-over set.
Even if you're in the latter stages of your career, maxing out an IRA or 401(k) for a limited period of time could make a huge difference for your retirement. If you're 57 and want to retire in 10 years, maxing out an IRA will give you an additional $97,000 to work with, assuming you earn an average annual 7% return on your money (that's a few percentage points below the stock market's average, and a reasonable assumption for that long a savings window). Max out a 401(k) for 10 years, meanwhile, and you'll be sitting on an additional $345,000, assuming that same 7% return.
If you can't max out your retirement plan, do the best you can. Cut some expenses in your budget to free up money so that you're able to increase your contributions by $100 or $200 a month. The more that goes into your retirement account, the greater of your chances of getting to maintain the lifestyle you've come to enjoy.
3. Have a plan for tackling healthcare expenses
Healthcare is the one expense that tends to catch retirees off guard. It's estimated that the average healthy 65-year-old couple retiring this year will spend an astounding $387,644 on healthcare in retirement, and that figure doesn't even include long-term care.
That's why it's crucial to set aside funds specifically for healthcare, and in this regard, contributing to a health savings account, or HSA, is a good bet. If you meet the requirements for eligibility, such as having a high-deductible health insurance plan, you can contribute up to $3,500 a year as an individual or up to $7,000 if you're funding that account for your family. And if you're 55 or older, you get an additional $1,000 catch-up on top of $3,500 or $7,000.
The money in your HSA can be withdrawn tax-free in retirement to cover qualified medical expenses, like copayments and deductibles. You can also use your HSA to cover long-term care, though it's also smart to explore your options for long-term care insurance, which can help defray the cost of expenses like nursing homes or assisted living facilities.
If you want to approach retirement from a place of financial security, it's imperative that you read up on Social Security, make the most of your retirement savings account, and devise a plan for tackling future healthcare expenses. Doing so will not only lower your chances of struggling financially, but give you the peace of mind you need to actually look forward to your golden years.