This content is provided courtesy of USAA.
The thing about saving for retirement is this: Most of us don't do enough of it.
According to the Center for Retirement Research at Boston College, the average 55-to-64-year-old with a retirement account has accumulated less than $100,000.
Think that's a lot? Consider this: If you want to make that $100,000 last the duration of your retirement, you should only withdraw $4,000 per year — or $365 per month. (Planners suggest taking out no more than 4% of your nest egg a year.) How much food, medicine and rent do you suppose that will buy each month for the next 20 years?
To get a sense of how you're faring, try one of the retirement calculators on usaa.com. If you find that you've got a shortfall, take a deep breath. You have some choices.
One of the most powerful things you can do is stay on the job as long as possible. "If you work longer, then good things can happen," says Anthony Webb, research economist with the Center for Retirement Research. "You have more years to contribute to your 401(k) and a shorter period of time that you're using your money."
Delaying retirement by just four years could potentially boost the value of your nest egg by a third, according to the Center; working eight more years could help increase that amount by 75%. Delaying when you take Social Security can also have a significant impact on your monthly check.
Don't like your current job? Start thinking about a post-work career. Is there a hobby you've always wanted to turn into a business? How about something that you think would be fun but never had enough nerve to try?
Whatever you do, think carefully before letting go of your paycheck at retirement age. "It's so much harder to get a new job than keeping the one you have," says Jack VanDerhei, research director of the Employee Benefit Research Institute.
Supersize your contributions.
Generally, the sooner you start to save, the less you have to put aside because the power of compounding interest is working for you.
Say you've got 20 years to retirement and you want to accumulate $500,000. That's a doable goal if you're willing and able to put aside $1,000 a month, says
Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ with USAA. That assumes an 8% rate of return on your investment and a hefty allocation to stocks and the risk that goes along with investing. If you're not comfortable with a lot of volatility — over a 20-year span you can expect repeated periods of volatility — then you might want to choose more conservative investments. But that will mean putting aside more money because such an investment mix will likely have a lower rate of return.
With 10 years to go before retirement (same goal and assumed return), you'll need to put aside roughly $2,800 a month, Halliwell says. Don't be put off by these dollar amounts. Remember, we are talking about pre-tax money if you are using a 401(k) or traditional IRA. That means if you're in the 25% tax bracket, it will only cost you $750 each month, not $1,000. Also, if your employer matches some portion of your 401(k) contribution, that counts toward your total monthly goal, too, meaning you have to come up with even less. People who are 50 and older can take advantage of the catch-up provision in their 401(k)s and contribute an additional $5,500 a year above and beyond the $16,500 limit.
Pare down your lifestyle.
The old rule of thumb is that you should plan to live on 75 to 80% of your pre-retirement income. But if you can live on less than that, you'll need less savings. "Maybe it's time to start thinking about downsizing," says Webb. You might be just as happy living in a small condo or in a more affordable part of the country. Perhaps you can make do with just one car and no cable.
Bear in mind, however, that one category of spending will not decline in retirement: health care. The elderly spend more on health care than any other age group. EBRI estimates that a couple retiring today at age 65 would need $158,000 to have a 50% chance of funding out-of-pocket health care costs throughout retirement.