Economic analysts have some bad news for soon-to-be-retirees. According to The Schwartz Center for Economic Policy Analysis, 2 out of every 5 Americans who land in the comfortable “middle class” category today will fall into poverty by the time they reach 65.
If that’s not a terrifying statement, I don’t know what is. Nearly half of Americans don’t participate in any retirement savings plans at work. Most pre-retirees don’t have a pension. How will they be able to afford a retirement when they eventually have to stop working?
Many of us are looking ahead at retirement and thinking about ways to build a layer of financial security around it. With the comfort of employer-sponsored pension plans all but gone, pre-retirees need a renewed focus on self-reliance. They also need a sound retirement plan. Understanding available strategies for funding a retirement and taking full advantage of them is the only path to stability in our older years.
So, what are the options?
Since every situation is different, there isn’t a magic bullet that will make a secure retirement possible for everyone. However, here are three thoughts to consider.
1. Wait to claim Social Security (if you can).
Yes, you can claim your benefits at 62, but that will permanently reduce your benefits by as much as 25-30%! Up to the age of 70, your benefit will grow larger for every year that you wait.
Of course, there are situations that may call for claiming early benefits. Perhaps you had a child late in life. In that case, you may want for him or her to collect 50% of your benefit as long as they are under the age of 18 or a full-time student under the age of 19. Or perhaps your health issues or family history don’t inspire confidence in a long retirement and it’s better to receive your payments now.
However, most people would benefit from waiting. A few extra years of working, saving, and making catch-up contributions to retirement savings accounts can make a big difference.
2. Don’t let Social Security be your only plan.
Too many people believe that Social Security plus Medicare is all they will need to live comfortably. That is not true! According to the Social Security Administration, most Americans can count on their Social Security check to replace about 40% of their pre-retirement income. That isn’t enough income, especially if you consider the likely increase in healthcare costs.
Build up your savings. Use accounts that give you preferential tax treatment, whether it’s your employer’s 401(k) or an IRA. Remember that an HSA (Healthcare Savings Account) is another under-rated yet very effective way to save money on taxes and build up a safety net.
. Don’t assume that you will be okay.
Many pre-retirees think that just because their retirement plans aren’t extravagant, they don’t need to do the math. That is a shortcut to pain, suffering, and disappointment. And the worst part is that by the time you realize that you are in trouble, it will be too late to change the outcome.
So, get proactive. Work with a financial planner to develop a budget for your retirement. Have a professional look over your investments. Ask a tax planner about the best way you could be using various types of accounts to maximize your tax savings. Don’t assume that working hard and saving diligently will automatically get you to the other side. And don’t assume that you should solve this puzzle on your own.
Finally, weigh your lifestyle choices – today and in the future.
Tradeoffs are the name of the game, aren’t they? If you want to save more for a future retirement, you must spend less today. Making the decision to save more money can be emotionally hard, especially when retirement is far away. Immediate temptations are shiny and urgent.
What’s the best way to override the endless tug of desire and instead focus on the right stuff? By making your vision of future retirement as real as you can. Some people create a vision board complete with pictures of their dream retirement. Others stay grounded through regular meetings with a financial planner or by using a budgeting app.
Either way, the value of professional allies cannot be overstated. Financial security in retirement is the result of good strategy and faithful execution. It’s about big decisions – Which house to buy? Which job to take? Where to go on vacation? It’s also about small sacrifices – resisting those designer shoes, taking a hard look at lowering your utility bills, and choosing to drive an older car for a few extra years. Above all else, it’s a long game. Build a strong professional team that will help you get to your goals.