Your golden years are supposed to be a time for relaxation, leisure and reflection. After all, you’ve spent the last several decades hard at work, so the last thing you want to do is spend retirement worried about money. Yet for nearly half of Americans, that’s the reality they’re facing if they don’t make changes.
Among Americans who are not yet retired, 46% say they don’t expect to be financially comfortable in retirement, according to a 2018 Gallup poll — a significant jump from 2002, the year Gallup starting tracking this statistic, when 32% of respondents said they wouldn’t have enough savings to retire comfortably.
These figures align with some of the other alarming statistics about soon-to-be-retirees’ lack of retirement savings, such as the fact that 21% of Americans have nothing at all saved for retirement, and a third of baby boomers have $25,000 or less stashed away, according to Northwestern Mutual.
The problem is that when you know you’re behind on your savings, it may feel impossible to catch up. Even if you know how much you should have saved by the time you retire, if you’re living paycheck to paycheck or struggling to save any portion of your income at all, that goal probably seems constantly out of reach.
But fear not. Sure, you may not become a millionaire by retirement, but there are simple ways to grow a healthier nest egg to ensure a more comfortable retirement for yourself.
Work longer than you planned
Admittedly, most people don’t like the idea of working longer than they must. But if your savings are falling short, you might not have a choice. On the bright side, by working even a few extra years more than you anticipated, you can add thousands of dollars to your retirement fund — making your retirement that much more robust when you eventually leave the workforce for good.
Here’s an illustration: You’re 45 years old, you have $10,000 saved for retirement, and you’re contributing $200 per month to your retirement fund, which earns a 7% annual return. At this rate, you’ll have about $137,000 saved by the time you turn 65 — a decent chunk of change, but not nearly enough to last more than a few years in retirement. But what if you delayed retirement by five years? In that case, you’d have more than $200,000 in your retirement fund when you were ready to leave your job.
You’ll see an even greater impact by increasing your monthly savings by even a little bit. In the example, if you were to contribute $250 each month instead of $200, then by age 70, you’d have nearly $245,000 saved.
And of course by working into your later years, your regular wages mean you won’t need to draw from your retirement accounts yet, letting those invested balances benefit from compounding growth.
Realistically, a quarter of a million dollars is probably still not enough to last through your whole retirement. With life expectancy longer than ever and healthcare costs on the rise, (Fidelity says the average 65-year-old couple will spend roughly $280,000 on out-of-pocket healthcare expenses in retirement), you’ll need a lot of savings to be able to pay for these escalating expenses.
The good news is that you can probably count on Social Security benefits as an income source, and by being strategic about when to start claiming them, you can boost your retirement income even higher.
Use a smart Social Security strategy
How much you’ll receive in Social Security each month depends on when you start claiming benefits. You can claim as early as age 62, but by doing so, you’ll receive smaller checks for the rest of your life. If you wait to claim until you reach your full retirement age (FRA), you’ll receive 100% of the benefits you’re entitled to. And by delaying until after your FRA (up until age 70), you’ll receive more than 100% of the benefits you’d get at FRA, a bonus for waiting. You can also claim any time in between those ages, and the exact amount you’ll receive will depend on how close you are to your FRA, which is defined by the Social Security Administration (SSA).
Say your FRA is 67; if you were to claim at that age, you’d receive $1,300 per month (the amount received by the average beneficiary according to SSA). If you were to claim early at 62, your benefits would be reduced by 30% — leaving you with $910 monthly checks. If you delayed claiming benefits until age 70, though, you’d receive a 24% bonus on top of your full amount (124%), giving you a total of $1,612 per month. That may not sound like a huge monthly difference, but it amounts to nearly $8,500 more per year, which is nothing to scoff at if you’re already struggling to save.
Between receiving bigger Social Security checks each month and working a few extra years, you can give yourself a much better shot at retiring comfortably.
A difference you can see
To see just how much of a difference it can make, let’s take a more in-depth look at the previous examples by putting them into practice and see how much income you could save for retirement. The 4% rule says you can safely withdraw 4% of your total savings the first year of retirement, and then adjust that number for inflation every year after to find your optimal withdrawal amount.
Say you’re 45 years old with $10,000 saved and are contributing $200 per month with a 7% annual return, and you want to retire at 62. You’d have a total of around $105,000 saved on your own by that age, and you’d also be receiving $910 per month in Social Security benefits by claiming early at 62. Using the 4% rule, you’d be able to withdraw $4,200 the first year of retirement, in addition to the $10,920 per year you’d receive from Social Security — bringing your annual income in your first year of retirement to $15,120.
However, if you increased your savings to $250 per month, and waited to retire and claim Social Security until age 70, you’d have around $245,000 saved on your own, and you’d receive $1,612 per month in Social Security benefits. Using the 4% rule tells you that you could safely withdraw $9,800 from your retirement fund the first year, plus you’ll receive $19,344 per year from Social Security, which brings your total income to the year to about $30,000 — double that in the first scenario.
In short, working those few extra years and stashing away an extra $50 per month could potentially double your yearly income in retirement. Depending on how far behind you are on your savings and how much you’d need each year to live comfortably in retirement, you may need to save more leading up to retirement, or consider working extra years to beef up your savings.
Just because you’re behind now doesn’t mean all hope is lost. It won’t necessarily be easy to catch up, but the earlier you realize you’re off track and start making changes, the more manageable retirement planning will be and the happier you’ll be when you finally retire.