Most of us work hard for several decades with the goal of someday being able to retire comfortably. But while today’s workers would probably like to retire with a decent lifestyle, their chances of doing so can appear daunting, which may lead them to putting off saving for retirement. Here are some of the common reasons for not saving for retirement, and why they sometimes don’t stand up to a little more scrutiny.
“I don’t make enough money to save”
If you make $50,000 per year, maxing out your 401(k) might not be possible for most people. But that doesn’t mean you can’t save something for the future. If you were to set aside $100 per month over a 30-year period and invest it at a 6% average annual return it would be worth $100,451. Make it $200 a month, and you’ll have $200,903, all other things being equal. Many workers are discouraged from saving for retirement because they feel their small contributions won’t make a difference. But if you save steadily and increase your contribution rate as your income rises, it can go a long way.
“I won’t need retirement savings”
Many workers believe they can count on Social Security alone to pay the bills in retirement. But that’s problematic for several reasons. Social Security wasn’t designed to be anyone’s sole income in retirement. According to the Social Security Administration, its payments replace about 40% of the average wage earner’s income after retiring, yet retirees may need about 70%-85% of their work income to live comfortably in retirement. After 2033, the Social Security program’s trust funds will likely be depleted, and once that happens, Social Security is only expected to collect enough in taxes to pay about 77% of scheduled benefits. This means Social Security will cover less than a third of income needs in retirement.
“I’m paying down debt”
If you are carrying a credit card balance or other high interest debt, paying it down can be the smart thing to do. But that doesn’t mean you should ignore your retirement savings completely. If you ignore your nest egg in the hopes of paying off your debt, you’ll risk having inadequate funds in the future.
“I don’t have a retirement plan through work”
Approximately one out of three workers don’t have access to a retirement plan through work, leaving them on their own to figure out how to save for retirement. Fortunately, recent retirement savings changes are making it easier for employers to offer some form of retirement saving. For those still without an employer provided retirement plan, it’s never been easier to open an IRA account and start saving with a few computer keystrokes. Unfortunately, this is still a pain point since most people don’t know where to start given the sheer number of choices they have to make: which bank, brokerage firm, or mutual fund company to use, what to invest in, how much to start saving, and do they want some help and/or advice. While we’ve made tremendous progress, we still need to make the process of saving for retirement as frictionless as possible.
“Inflation is eating into my budget”
The impact of 40-year high inflation is hitting retirement accounts as many Americans say they are stopping or reducing retirement savings because of it. More than half (54%) of Americans say they have stopped or reduced retirement savings due to inflation, according to the 2022 Q3 Quarterly Market Perceptions Study from Allianz Life Insurance Company of North America. When costs increase, you might need to review how your money is spent every month. If you truly need to stop saving for several months, it can be helpful to set a date when you will pick up the habit again. Stopping retirement contributions in the short term typically isn’t much of a problem but prolonging them can have negative consequences for the long-term.
Regardless of the current environment, it’s pretty clear we still need to continue saving if we want to live comfortably in our retirement years. The next question is: How much should you be saving? The exact amount you should have ready for retirement varies widely. It depends on the lifestyle you’re looking to have, your location, who you’re supporting and many other details. Here are some general guidelines and rules of thumb to see if you are on the right path:
- Save at least 10% to 20% of your pretax income
- Fidelity’s Retirement Savings Goalposts by Age
- The 4% rule
- Online retirement savings calculators
While the above resources can provide some general guidance, if you want to ensure your retirement funds are adequate, please consider speaking to us. We can help you develop a savings and investing strategy that fits your specific goals.