Social Security generally doesn't provide enough income for seniors to live on -- at least comfortably, anyway. The average recipient today collects about $18,000 a year, but if your earnings are below average, you may be in line for a smaller benefit once you retire. That's why it's crucial to save money for retirement on your own. If you don't, you'll risk winding up cash-strapped once your time in the workforce comes to an end.
But new data reveals that Americans have done a remarkably poor job of saving for retirement in the last year. Specifically, 30% haven't socked away so much as a dime over the past 12 months, according to the SimplyWise September 2020 Retirement Confidence Index.
Now to be fair, the COVID-19 crisis has messed with a lot of people's savings goals. Those who lost their jobs in the course of the pandemic may have had no choice but to pause their retirement plan contributions, and even those who have stayed employed may have chosen to cut back on long-term savings and instead focus on building their emergency funds.
At the same time, let's remember that the COVID-19 outbreak didn't really start to impact the U.S. until March. And many Americans hadn't even heard the word "coronavirus" buzzing around prior to January. Even if we want to attribute some lack of savings to the pandemic, workers still had multiple months before it began to make contributions to a retirement plan -- yet 30% didn't.
If your retirement savings efforts are on hold right now due to the ongoing recession, that's OK -- if your income has taken a hit or you're fearful of losing your job, you're better off focusing on your near-term needs and worrying about retirement once the greater situation improves. But once the pandemic is over, it's imperative that you get yourself back on track -- before you wait too long and struggle during retirement as a result.
How much should you be saving for retirement?
As a general rule, you should aim to sock away 15% to 20% of your income or more for your senior years. But if you're not in the habit of funding a retirement plan, you may need to start out with baby steps and work your way up. The key, however, is to start setting aside some amount of money for the future as soon as you can with the goal of boosting your savings rate as your financial picture allows for.
For example, say you earn $50,000 a year right now. That means that ideally, you'd be setting aside $7,500 to $10,000 annually in a 401(k) or IRA. But if your paychecks are largely maxed out by your living expenses, you may not be able to move to a cheaper home or dump your expensive car payment overnight. If that's the case, and you can only save $2,000 a year in the near term, do that rather than ignore your savings. But at the same time, make an effort to start cutting back on expenses, or make a plan to do so when it's feasible. If you're eight months into a year-long apartment lease that eats up 30% of your take-home pay, pledge to move to a home that's a lot cheaper once that agreement comes to an end and you're no longer obligated to it. Or, stay in your current home but find a roommate to split the rent with.
Similarly, say your $50,000 salary gets bumped up to $55,000 next year. In that case, make sure to sock away that extra $5,000. Since it's money you were never used to living on, that should really be doable.
While it's understandable that Americans have been cutting back on retirement savings in light of the COVID-19 pandemic, the reality is that many were ignoring their nest eggs well before the health crisis erupted. If you fall into that category, promise yourself you'll do better. Your retirement really depends on it.