You're probably aware that planning to retire on Social Security alone is a poor choice. Those benefits, at least at present, will only replace about 40% of your pre-retirement wages if you're an average earner. And most retirees need a lot more income than that to maintain a comfortable lifestyle.
That's where your retirement savings come in. Unfortunately, a good 78% of Americans have been struggling to fund their retirement plans, according to the latest New York Life Wealth Watch survey. And here are some of the main reasons why.
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1. Inflation
Inflation has been driving living costs upward, and not surprisingly, it's made it more difficult for a lot of people to fund a 401(k) or IRA. The good news, though, is that inflation has been cooling, so if you've had to hit pause on your retirement plan contributions this past year or two, things could soon change.
That said, rethinking your spending could also make it possible to fund your nest egg, even with living costs being high. You may not like the idea of having to give up small luxuries like restaurant food and digital entertainment. But if you don't give those things up now, you might have to give up a lot more once retirement rolls around.
2. Unexpected expenses
Many savers have had to grapple with unplanned bills, and that's impacted their ability to sock money away for retirement. It's easy to see how a sudden medical expense or home repair might force you to pause your IRA or 401(k) contributions. But if you do your part to build up a solid emergency fund, you might avoid a scenario in which you need to cut back on retirement plan contributions in the future.
Just as importantly, having an emergency fund could make you less tempted to tap your retirement account prematurely and get hit with an early withdrawal penalty as a result. You should aim for an emergency fund with enough cash to cover three months' worth or more of essential bills.
3. Health issues
A sudden medical issue could have far-reaching consequences. It could force you to take time off from work and result in a world of bills.
Even if you do your part to take care of your health, that may not be enough to prevent an accident or illness from sidelining you and costing you money. But you can at least do your part to save for healthcare costs by funding a health savings account (HSA) if your current insurance plan is compatible with one. If you allocate funds specifically for healthcare expenses, you might be better positioned to continue contributing to your retirement account when a large medical bill arises.
Plus, the nice thing about HSAs is that they allow you to invest funds you aren't using to grow your balance. So even if you're only able to carve out a few hundred dollars for your HSA this year, it could go a long way over time.
Not being able to save for retirement is apt to be frustrating when it's an objective that's on your radar. But if you take a deeper dive into your spending, build an emergency fund, and grow an HSA balance, you might land in a better position to keep contributing to a retirement account even when your financial situation takes a turn for the worse.
