Planning for retirement isn't particularly easy, and it can be even more challenging in the midst of the coronavirus pandemic. The average 401(k) balance dropped by around 19% during the first quarter of 2020, according to new research from Fidelity Investments, and the average IRA balance dipped by roughly 14% during this time period.
Even if your savings have taken a hit, it's still important to continue preparing for your future the best you can. Saving for retirement takes decades of consistent work, and if you wait too long to get started, it will be more difficult to catch up. However, roughly half of Americans haven't taken this basic retirement planning step.
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Workers are preparing for retirement without a plan
When you're saving for retirement (or any other financial goal), it's important to have a roadmap. If you don't have a savings goal and a plan for how you're going to reach it, it's difficult to tell whether you're on track.
However, too many workers don't have a roadmap when preparing for retirement. Only 48% of workers say they've tried to calculate how much they should save, according to a new report from the Employee Benefit Research Institute (EBRI), even though the survey also found that those who do calculate their savings goals are more confident in their retirement security.
It can be intimidating to calculate how much you need to save for retirement, especially if you're feeling overwhelmed by this massive goal. Around 40% of workers estimate they'll need to save at least $1 million for retirement, the EBRI survey revealed, and if you're already behind on your savings, calculating your goal might make you feel even more behind.
Figuring out how much you need to save is one of the best ways to set yourself up for retirement success, however intimidating it may be. When you have an overarching savings goal in mind, you can rest easier knowing you'll be more financially secure in retirement.
Calculating your retirement number
To ensure your savings goal is as accurate as possible, you'll need to do a little research before crunching the numbers.
First, think about how much you expect to spend each year in retirement. Many people estimate they'll spend around 75% to 85% of what they're spending now, but it's a good idea to actually map out your future costs to make sure this estimate is accurate. These numbers don't have to be exact, of course, but consider whether you might travel extensively, pick up expensive new hobbies, or add any other significant costs to your budget.
Also, don't forget about healthcare costs. Even if you're eligible for Medicare, you'll still face some out-of-pocket costs like premiums, deductibles, copays, and coinsurance. The average retiree spends around $4,300 per year on out-of-pocket healthcare expenses, according to a study from the Center for Retirement Research at Boston College, so try your best to account for these costs as much as possible.
Next, think about what age you want to retire. This is important because it will affect how long you have to save, as well as how many years your money has to last. COVID-19 may affect this factor, because if you're nearing retirement age and your savings aren't as strong as they once were, you may choose to delay retirement by a couple of years so your investments have more time to recover from this stock market downturn.
Finally, consider how Social Security benefits will play into your retirement plan. You can get an estimate of how much you can expect to receive in benefits based on your real earnings by creating a mySocialSecurity account. When you know approximately how much you expect to spend in retirement, as well as how much you'll collect from Social Security, you can figure out how much of your retirement income will need to come from your savings.
Once you have all these numbers, run your information through a retirement calculator to get an estimate of how much you need to save by the time you retire, as well as how much you should be saving every month to reach that goal.
Calculating your savings goal takes some legwork, but it's the best way to ensure you're saving enough for retirement. With this goal in mind, you'll be on your way to enjoying your senior years as comfortably as possible.
