Note – The following post is part of a series of retirement education blog posts on Money Q&A and sponsored by USAA. But, like always, all opinions are my own.
There’s a lot of doom and gloom reporting these days about Baby Boomers not saving enough for retirement. The lack of savings is only expected to get worse for Millennials, who are saddled with comparatively more student loan debt and struggling with slower rates of wage growth compared to their parents and grandparents’ generations.
Whether you’re trying to save for retirement in your 20s or you’re in your late 40s or early 50s and on the verge of retiring within the next decade, the issue of saving enough money for retirement can be complicated and confusing for people of all ages. After all, you likely don’t want to remain in the workforce for the rest of your life, but you also don’t want to retire too soon and possibly run out of money while you’re still around.
Am I Saving Enough for Retirement?
The general rule of thumb is to save 10 to 12 times your salary. And, Dave Ramsey recommends investing 15% of your annual income for retirement. But individual circumstances often may require that you save more or even less. Retirement is not a one size fits all experience. The proper retirement planning depends on each person’s unique circumstances.
Even if you feel like you are behind in your saving for retirement, don’t panic. There is still a lot you can do. If you’re concerned that you might not be saving enough for retirement, then here are some essential questions you should ask yourself.
What Are Your Current Spending Habits?
A common misconception about retirement is that people think their expenses will decrease when, in reality, their expenses during retirement will increase. The increased costs are due to a variety of possible factors, including (but certainly not limited to):
- More money spent on hobbies and traveling (how else will you fill up your newfound free time during retirement?)
- Costlier healthcare bills
- Splurging on your grandchildren (and/or pets)
- Dining out more frequently
For these reasons, it’s important to overestimate how much your retirement expenses might be, rather than assuming your current expenses will decrease once you retire.
Will You Downsize?
One surefire way you can decrease your expenses during retirement is by downsizing your home. If you currently rent or own a 2-3+ bedroom home close to your job, then is it really necessary to continue living in such a large residence with close proximity to work once you retire from the workforce?
While it’s normal to feel emotionally attached to the home you’ve lived in for several years, it’s not a practical choice to continue paying rent or mortgage payments (or property taxes) when you could move someplace else that requires less maintenance and lower monthly payments. Downsizing can save you a lot of time, money and effort throughout your retirement, not to mention opening up lucrative rental opportunities for home-owning retirees who want to supplement their incomes by listing their former primary residence on Airbnb.
Saving for retirement is only the beginning. You have to keep building on your hard work with a retirement plan that helps you have the lifestyle you want in retirement.
How Long Will Your Retirement Last?
The longevity of your retired life is an uncomfortable topic for many people to think and talk about, but it’s nevertheless essential to consider when you’re assessing whether your current savings rate will sufficiently support you during your retirement years. To be brief: what might your expected lifespan be? If you have a family history of cancer(s) or other genetically inheritable diseases, it’s worth taking these potential concerns into account (both in terms of how much you might pay out of pocket for healthcare and how long you might live for).
Your current lifestyle and gender may also influence how long your retirement could last. Statistically speaking, people who smoke and/or drink alcohol don’t live as long as sober non-smokers, and women tend to live longer than men, on average. These guidelines aren’t precise by any means, but they do suggest that non-smoking women should save more for retirement because they’re most likely to live the longest.
You don’t want to risk running out of money during retirement, so it’s always best to assume you’ll live longer than your parents and grandparents and save for your own retirement accordingly.
I always have a sinking feeling that I’m not saving enough for retirement. I try to increase my monthly investments in my Thrift Savings Plan (the federal government’s version of the 401k) and my Roth IRAs.
Every time I receive a pay raise, I increase my contributions to my retirement plans. In the military, we typically receive a cost of living raise most years after the New Year. I try to sock away at least half of that new found money in retirement accounts. The same is true with the longevity raises we typically get every two years of service in the military.
I’m not saying that you shouldn’t have fun with your pay raises. You definitely should. But, you should also set some of that money aside and increase your retirement nest egg.
Could Unexpected Expenses Come Up?
When you’re in your 20s and 30s, you’re likely more concerned about repaying student loans and saving for a home than you are about long-term healthcare. When you’re in your 40s and 50s, this equation flips. You may be in perfect health now, exercise regularly, and consume lots of water and nutritious foods, but even the healthiest individuals aren’t entirely immune from age-related illnesses and injuries.
Healthcare is another major reason why you need to overestimate how much money you’ll need during retirement; once you leave your career, you likely won’t have access to premium, employer-sponsored healthcare plans and the ability to work overtime to earn more money to cover medical bills. You’ll likely be on Medicare with a fixed monthly income that doesn’t offer much wiggle room to cover significant hospital visits, surgeries and rehabilitation services, so it’s crucial that you start saving now to avoid the financial pain of age-related health problems later.
Consider Starting with an IRA
For many people, an individual retirement account (IRA) is the core of their retirement savings. Within your IRA, you can use almost any type of investment such as mutual funds, stocks, bonds, certificates of deposit, and even have a managed portfolio. Whatever you choose, a traditional or Roth IRA gives potential tax benefits that make them even more attractive.
Maybe Think of an IRA or 401k Rollover
If you already have an IRA, 401(k), Thrift Savings Plan (TSP) or an employer-sponsored retirement plan, you may want to consider whether an IRA rollover is right for you. I like being able to see all of my retirement investments all in one place.
If you rollover your IRAs or 401k retirement plan and choose a company like USAA, they give you easy-to-follow instructions and access to a team of professionals who can offer guidance when you need it. They can also even follow up with your current financial institution, if necessary, to help you with the process.
Target Date Retirement Funds
If you’re a fan of “setting it and forgetting it”, you may want to consider target dated retirement funds. Most 401k retirement plans offer targeted retirement funds that rebalance every year or so and adjust the fund’s risk level based on your target retirement date.
Even the Thrift Savings Plan (TSP), the federal government’s version of the 401k retirement plan offers these funds. They call them Lifecycle funds. And, USAA offers target retirement funds as well.
Tools and Calculators Are a Great Starting Point
Retirement is not a one size fits all experience. The proper retirement planning depends on each person’s unique circumstances.
Find out if you’re on track to meet your retirement goals. To get more details on your retirement planning needs, check out USAA’s advanced retirement calculators. They can help you determine how long your savings could last. You tell the calculators how much you’re saving and how you typically invest. Then, they will show you how much you may need to retire.
You can also discuss your results with a USAA advisor. Tools and calculators are a great starting point. But then an advisor can help make sense of the data – especially if an advisor is free!
USAA Financial Advisors can help you:
- Review your savings strategy.
- Determine how long your savings could last.
- Help protect your savings from market volatility.
Get your retirement review today.
Call 800-531-3392 to speak to an advisor.
A vast majority of American adults should be saving more for retirement than they currently are. Many people often latch onto the notion that having $1 million or more in a retirement nest egg is the right number. But everyone is different. Maybe you need more. Perhaps you and your family need less to sustain you during retirement.
The fact of the matter is that the “right” retirement savings amount differs from person to person. But, now is the time to look at how much your saving. Consider if you need to save more. And find out of you have the right mix of investment allocations.
That’s why talking to a professional like the ones at USAA to get advice is so important.