Figuring out how much money you’ll need in retirement can be tricky. After all, while some factors are in your control — such as what sort of lifestyle you plan to lead in retirement — others, like your life expectancy, are nigh impossible to predict.
Researchers at Morningstar are trying to narrow down how things will play out for most Americans. The investing research firm recently released an updated model of U.S. retirement outcomes based on spending, investing and life expectancy data, among a litany of other factors.
Morningstar’s model — which assumes a hardly guaranteed status quo for Social Security benefits in the future — predicts that 45% of U.S. households will run short of money in retirement. For a large chunk of Americans, that could mean returning to work, going into debt or drastically reducing costs to make ends meet.
But if it’s still relatively early in your retirement savings journey, there are two major levers you can pull that drastically increase the chances you’ll have enough money to live on in retirement and even pass along to your loved ones.
One is investing in a workplace retirement account. Morningstar found that 79% of Americans who have at least 20 years of future participation in a defined-contribution plan, such as a 401(k) or 403(b), will have enough money to sustain their expenses in retirement.
The other is getting the timing of your retirement right — and the longer you wait, the better. Morningstar projects that 45% of households will fall short in retirement with a retirement age of 65. That figure falls to 28% for households who delay retirement until age 70.
How to increase your chances of fully funding your retirement
When it comes to setting yourself up for a sustainable retirement, it’s very clear what tends to trip people up, says Jack VanDerhei, director of retirement studies at Morningstar Retirement and one of the study’s co-authors: “Spending longer and saving less.”
Indeed, the less money you have saved and the longer you need to make it last in retirement, the higher the chances that your coffers will run dry.
If you follow a common model, you save throughout your life in a tax-advantaged retirement account, and once you stop working, you replace your salary with a combination of Social Security and pension income (the latter is rarer these days) along with periodic withdrawals from your portfolio.
Your chances of your income lasting throughout your retirement, then, rely on maximizing your Social Security benefits and building a large enough portfolio to withdraw from indefinitely.
Here’s how to skew the odds in your favor.
Save in a workplace retirement account
It’s not hard to see why saving in a workplace retirement account tends to boost the odds of a successful retirement. By enrolling in a 401(k), for instance, you sign up to have money diverted from your paycheck directly into your portfolio, which drastically decreases the chances that you’ll spend it.
You also potentially earn a matching contribution from your employer, a benefit that financial planners often call “free money.”
By consistently investing over at least two decades — ideally more — you allow the power of compounding interest to drastically up the value of your portfolio.
“The main takeaway for young people — or at least a really important thing to highlight — is that if you have access to a plan but don’t participate, we definitely encourage you to participate,” says Spencer Look, associate director of retirement studies at Morningstar Retirement and the study’s co-author. “Just saving something is better than nothing.”
If you don’t have access to a workplace retirement plan, “saving outside of one, in an IRA, is really important,” says Look. “If you mimic [contributing to a workplace retirement account] outside of the plan, you’re still setting yourself up for retirement.”
Delay retirement if you can
Not everyone has the ability to keep working until they’re 70. But if you can, delaying retirement as long as possible has a positive “two-pronged effect” on your retirement sustainability, says Look.
For one, you shorten the amount of time you need your money to last, reducing the amount you theoretically need to have at retirement.
For another, you boost another source of income: Social Security. For anyone born after 1960, full Social Security benefits kick in at age 67. You can claim Social Security as early as age 62, but will receive a reduced benefit. Conversely, the Social Security Administration will boost your benefit by 8% per year for each year beyond full retirement that you delay claiming, up to age 70.
It’s easy to see, then, why those who retire at 70 have so much more success in Morningstar’s model. And even if you can’t delay that long, it’s likely wise to work as long as you’re able, says Look.
“It can be pretty dramatic for people. You see the results retiring at 70. It’s not possible for everyone,” he says. “But even working a little bit part time if you don’t have enough savings is something that could be helpful.”
