Rosalind Evans
It’s challenging to save because we often consider our “future selves” as unrelated entities, making our present-day choices reflect this perception.
Saving Narratives
A 2022 survey by Bankrate revealed that over half of employed Americans believe they need to save more for retirement, with one in four having no retirement savings. About 54% of survey respondents blamed their inadequate retirement savings on inflation, with others pointing to new expenses and stagnant or diminished income.
Psychological hindrances also play a role in our future planning. The difficulty lies in forsaking immediate pleasures for long-term gains as we struggle to visualize ourselves in the far-off future. Studies show that while it’s relatively easy to identify with our “future selves” a few months ahead, we often see ourselves as total strangers when thinking about who we will be decades from now.
This psychological trait and the current economic climate make it understandable why so many people lag in retirement savings. However, no matter how daunting your current financial situation may appear, there is always time to take steps forward and regain control. Here’s how.
Navigating the road to recovery
Recognizing falling behind on your retirement savings may prompt you to turn a blind eye and continue with life. But acknowledging the situation can aid in propelling you toward the next phase.
A strategy to regain control involves examining your monthly finances and scrutinizing your spending. This method can help you determine your spending patterns and potential areas where you can reduce expenses to save more.
Review your bank statements and identify sections where you’re spending excessively. For instance, are there any unused subscriptions you’re paying for? Could you minimize waste by removing items that spoil in your fridge from your grocery list? While these may seem like small steps individually, collectively, they can significantly boost your savings.
Identifying your retirement savings target
While it’s beneficial to increase your contributions, it’s crucial to determine your retirement needs and aim for that target. Your retirement sum will largely depend on your current age, desired retirement age, and the lifestyle you wish to maintain post-retirement.
Julius Lau, a retirement financial advisor at 9 Fortunes, Inc., emphasizes the importance of considering your unique circumstances when calculating your retirement target.
“Your retirement plan should align with your plans,” he suggests. “A holistic approach that addresses individual needs and desires is vital in crafting a retirement strategy. Are income concerns causing anxiety? Are there worries about maintaining a travel lifestyle?”
Factoring in personal issues is key when planning for retirement. Personal decisions will affect your retirement funds, thus, taking everything into account is vital in this process.
In 2021, the Center for retirement research at Boston College reported that the average retirement age for men was 65, and for women, it was 62. While these ages are commonly seen as the “standard,” they are not set in stone. You can retire earlier or later — the crucial factor is ensuring you have sufficient funds by your desired retirement age.
Determining the needed amount
One way to assess this is using the 4% rule, which states that you should save enough to live off 4% of your portfolio in the first year after retirement.
Founder and CEO of Mosaic Wealth Partners, Eric M. Jaffe, says, “Determining the cost of maintaining a certain lifestyle in retirement and adjusting for taxes and upcoming income is crucial to maintaining a certain lifestyle in retirement.”
He advises dividing this amount by .04 (representing the 4% withdrawal rate), which should indicate your total asset pool required at retirement. Inflation is also a factor to consider because maintaining a similar standard of living in retirement might be more expensive. Your financial future can be better understood using an online retirement calculator.
Determining your contributions
Once you’ve identified your total savings goal, you can translate that into a plan for your monthly contributions. For instance, if you aim to save $672,000 over 20 years, that’s 240 months. You’d need to set aside $2,800 per month. However, this needs to account for potential growth from investing in a retirement vehicle like a 401(k).
Remember, retirement savings is a marathon, not a sprint. You may experience periods of losses rather than gains, but historically, long-term gains have outweighed losses, typically around 7%. This represents your annualized return rate on your savings for that year.
While knowing your total savings goal is helpful, it’s more critical to start saving for retirement as soon as possible. If you can’t save $2,800 a month, save whatever you can afford. Start with small, consistent savings and gradually increase towards your target. The Singleton Foundation offers an excellent tool to set goals and visualize the potential growth of your retirement savings.
Establish automatic transfers from your bank account with set amounts each month to maintain consistency. 401(k) plans, and similar plans may offer direct deposit of earnings before they reach your bank account. Contribute what you can afford, ensuring your daily expenses are met before embarking on this journey.
Capitalizing on free money
Employer matching allows employees to contribute up to a specific limit to retirement accounts. Some employers offer 401(k) plans or other retirement investment options. Contribute the maximum amount allowed if possible.
In 2023, the maximum annual contribution for a 401(k) is $22,500, while for an IRA, it’s $6,500. IRA contributions can be increased by $1,000 and 401(k) contributions by $7,500 if you’re over 50. If you’re older and can afford this additional contribution, it can help you catch up.
Other vital factors
Debt can significantly hinder your ability to save for retirement. To maintain your desired lifestyle after retirement, you’ll need to consider your debt as an ongoing expense when building your portfolio. If you’re in debt, prioritizing getting out of it is essential.
Consider changing jobs if you have the capacity and resources. Higher earnings mean the potential to save more. However, ask yourself: Will there be costs to establish yourself in the new career? How will these factors impact your retirement savings?
“You may be able to save more for retirement if your income rises without increasing your expenses,” Jaffe says. It can be advantageous if a new job or career offers benefits like a generous retirement plan, improved employer matching, superior health coverage, or a pension.
Every strategy to regain control of your retirement savings will be unique. But one aspect is universal: The earlier you start saving, the better.
If you need help understanding your financial landscape, consider seeking advice from a financial advisor. They can assist you in evaluating your progress toward your goals and offer suggestions for improving your savings and investment strategies.
“Advisors assist in assessing different types of retirement savings vehicles and help determine which best fits your circumstances, e.g., deciding between IRA and Roth IRA,” Jaffe adds.
Remember that hiring a financial advisor incurs a cost. Seek out fee-based financial planners who charge a flat rate for their services. Some local non-profits may also offer free financial services.
While hiring a financial advisor may not always be necessary or feasible, they can alleviate the stress of financial planning and guide you back on the path toward a robust retirement portfolio.
In conclusion, even if you’re late in saving for retirement, it’s crucial to remember that it’s always early enough to start. The key is to begin by understanding your current financial situation and setting realistic goals for the future. It’s essential to make changes, whether cutting back on unnecessary expenses, contributing more to your retirement accounts, or seeking professional advice.
Dedication, planning, and time allow you to catch up on your retirement savings and look forward to a financially secure future. Remember, your future self is not a stranger; they are you and deserve the same consideration and care you give to your present self. So start taking steps today to ensure a comfortable retirement tomorrow.
