Retirement often seems far away, leading many Americans to think they have plenty of time left to save for it. But as anyone who's ever reminisced about the past knows, time goes by faster than you think. Putting off retirement savings for too long can make it difficult to save enough when you do begin, which could jeopardize your financial security.
It's a problem that 62% of Americans are facing, according to a recent TD Ameritrade survey. Approximately half of baby boomers, three-quarters of Gen Xers, and three in five millennials say they're behind on retirement savings. But perhaps more disturbing is that roughly 58% of these individuals also said they could retire comfortably on $1 million -- which is probably not accurate for most people. This indicates that many of these individuals might be even further behind than they thought. Here's what you can do to get back on track if you're one of them.
Figure out how much you actually need for retirement
In order to figure out how much you must save each month for retirement, you must first estimate the cost of your retirement. This estimate will never be completely accurate because you don't know how long you'll live or what unforeseen expenses might arise, but it can get you close.
Start by estimating the length of your retirement. Subtract your preferred retirement age from your estimated life expectancy. Plan to live a long life just in case. The Social Security Administration says that one in three 65-year-olds retiring today will live past 90, and one in seven will live past 95, so you could be looking at 30 or more years in retirement if you retire at the traditional age of 65.
Next, you must total up your estimated living expenses in retirement. This includes your food, housing costs, insurance, clothing, and entertainment. If you plan to travel, add these costs in as well. The average household headed by an adult 65 or older spent about $50,000 in 2018, and you can expect this average to rise over time as inflation drives up costs. You can use this figure to judge whether you're in the right ballpark, but your expenses could be much higher or lower than this, depending on your lifestyle and where you live.
Multiply your estimated annual expenses by the number of years you'll be in retirement, adding 3% annually for inflation. It's easiest to let a retirement calculator do this for you. It can also calculate your investment rate of return. This could be as high as 8%, but use 5% to 6% to be conservative in case the markets take a turn for the worse. Your calculator should tell you how much you must save in total and per month to reach your goal. Subtract money you expect from a 401(k) match, a pension, or Social Security. Make a my Social Security account to estimate your Social Security benefit if you're unsure how much to expect from the program.
Just based on the estimates listed above -- a 30-year retirement spending $50,000 per year with adjustments for inflation -- a typical retirement could cost around $2.4 million. You won't have to save all of this yourself. Social Security will likely knock off a few hundred thousand dollars if you qualify for it, but the $1 million estimate that those surveyed by TD Ameritrade thought they would need might not go as far as they'd hoped.
How to catch up if you're behind on retirement savings
Now that you know how much you need to save for retirement, you can begin crafting a plan for how to make that happen. This might be as simple as raising your retirement contribution rate if your current budget allows for it. Just stay mindful of your retirement account's contribution limits. This is $19,000 for a 401(k) in 2019 and $6,000 for an IRA. Adults 50 and older may contribute up to $25,000 and $7,000, respectively.
Those unable to save as much as their retirement plan recommends should try making adjustments to their budget. Cut back on dining out and unnecessary purchases, and prioritize debt repayment if you have credit card or student loan debt that's preventing you from saving for your future. Put the extra money you free up toward your retirement. You could also look for ways to boost your income, like pursuing a promotion or starting a side business, and put any windfalls like a year-end bonus or tax refund toward retirement.
When you can't trim your budget enough to make ends meet, try delaying your retirement. This has the dual benefit of reducing your retirement expenses while also giving you more time to save. Another option is to transition into retirement slowly by working part time and reducing your hours until you're fully retired. This reduces your reliance on your retirement savings during the early years of your retirement, enabling what you do have to continue to grow in your account for longer.
If all else fails, consult with a financial advisor who may be able to give you advice on how best to invest your savings and alter your retirement plan so it works for you. Avoid fee-based advisors. Choose a fee-only advisor instead, as fee-only advisors charge flat fees for their services. Fee-based advisors, on the other hand, can also earn commissions when you invest in the assets they recommend, which can cause conflicts of interest.
Catching up on retirement savings is possible, but you need an accurate idea of how much you must save and the diligence to stick to a retirement plan. Re-evaluate your plan at least once per year and anytime you change employers or experience a major family or health event so you can make adjustments as needed.