If you are among the 46% of Americans who don’t expect they will be financially comfortable when they retire, you need to take certain steps now. Some of these measures are simple, others more complicated.
1. Reduce debt. This step is imperative if you’re on a fixed or limited income. Debt payments in retirement can make necessary payments more difficult as they reduce your retirement income.
Reducing expenses, even the small ones, is a big part of reducing debt. Forbes business writer Stephanie Taylor Christensen says saving just $25 week in this manner adds up to an extra $100 a month for your retirement account.
“That may be accomplished by swapping your latte for a more boring brew, checking out a library book instead of buying at the bookstore, passing on that impulse buy while you wait in a checkout line, or walking a few blocks instead of hopping into that Uber,” Christensen writes.
2. Boost retirement savings accounts. You should have an IRA or 401(k) plan, both of which grow based on the more you contribute. If you’re still working, you employer may sponsor a 401(k) retirement plan. You can make salary-deferral contributions on a post-tax and/or pretax basis.
An IRA (individual retirement account) consist of a range of financial products such as stocks, bonds or mutual funds. There are several types of IRAs as of 2018: traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
The difference is that your company can set up a matching program for your 401(k), but not for an IRA. Your employer may deduct contributions from your paycheck and deposit them into your IRA, but a payroll IRA doesn’t allow an employer to contribute additional matching funds.
In addition, the contribution limit is higher with a 401(k) – $18,500 in 2018, $24,500 if you are 50 or older. The limit for IRA contributions is $5,500 for most people and $6,500 for those 50 and older.
In either case, it is imperative that you establish automatic contributions that will dedicate a specific amount of money from each paycheck to go into an employer-sponsored retirement account or an individual retirement account you’ve established on your own.
Renowned behavioral economist Richard H. Thaler calls automation a “nudge” of sorts. He explains that it can help even the most financially savvy resist their most basic (and irrational) human impulses, like spending when they should save, or procrastinating on when or how much they put into retirement savings.
3. Invest windfalls. If you come into some unexpected cash, direct at least a portion of it to your retirement savings accounts. It could be a tax refund, bonus or inheritance. Maybe you’ve followed the advice about reducing or eliminating debt, and now have extra cash. You’d be wise to invest it in your future.
4. Postpone retirement. If you can work two or three more years after your planned retirement, you can grow your savings instead of depleting it. If you continue your full-time job, you can also use your employer-sponsored health insurance for a few more years and collect some more matching funds in your 401(k).
5. Downsize. Can you move into a smaller home or to a state with lower taxes or a lower cost of living? You can save on property taxes, insurance costs, home maintenance expenses, utility costs, landscaping bills, living expenses, and more.
The 46% figure used at the start of this blog comes from the Gallup analytics and advice firm. When Gallup first began tracking retirement preparedness in 2002 to 2004, the percentage of respondents who didn’t expect to live comfortably in retirement was only 32% to 36%.
One in three Americans have less than $5,000 saved for retirement, and one in five have no savings at all, according to the 2018 Planning & Progress study by Northwestern Mutual. The study also found that a third of baby boomers, the generation nearest to retirement, have between $0 and $25,000 set aside.
You don’t want to be in any of those groups. Committing to these basic steps is a great way to get motivated to save.