You know it’s important to save for retirement, but are you saving enough? Where do your peers stand with their 401(k) plans?
You need to know how your 401(k) measures up compared to others and if you’re on track to having enough money to last you 20 to 30 years after you stop working.
How Much Money Will You Need?
A guideline you can utilize is Fidelity’s Savings Factor. The calculation is straightforward and helps you see if you’re on the right track. You multiply your current income by the savings factor associated with your age.
For example, if you’re 30 years old, your 401(k) should reflect the amount of your current income. If you earn $25,000 annually, then this is the amount that should be in your 401(k). The savings factor increases as you get older and further into your career. By the time you reach 50 years old, your 401(k) should reflect six times your current annual income.
American Workers Aren’t Saving Enough
Unfortunately, most people are nowhere near the recommended savings levels. Two-thirds of Americans are not saving with a 401(k), and only 14% of employers are providing a defined benefit plan.
On average, individuals from 55 to 64 years old have a 401(k) with only $104,000 — well below what they’ll need, according to the 2015 Government Accountability Office study.
Seniors ages 65 to 74 fair only slightly better with $148,000 on average, but are now eager to retire whether they have enough funds. If you take inflation into account, these people will only have approximately $649 per month. Half of the retirees rely on Social Security to make ends meet.
In households of people ages 55 and older, 29% do not have a defined benefit plan or retirement savings, and only 35% of those own their home without debt.
How You Can Catch Up
If you’re lagging according to the figures above, first confirm where you are by using a retirement calculator, like the Fidelity Retirement Calculator and other online tools. If you’re truly behind, don’t worry. It’s not too late to catch up and get on track to reaching your financial goals.
Fidelity recommends this four-step approach:
It’s time to save more with a smart approach.
Make sure you are saving 15% of your income each year. This figure can also include your 401(k) employer-matching contributions. If you are under the age of 35, experts suggest you begin saving and investing early to take advantage of the 30 to 40-year period of working.
Individuals ages 35 to 50 should begin increasing their savings by at least one percent annually. If you’re 50 or older, make catch-up contributions and pinpoint a later retirement age.
Don’t just save — invest and diversify.
Consider investing in stocks and mutual funds to grow your savings. A financial consultant may recommend expanding your portfolio to include U.S. and international financial products as well as real estate. Having a broad portfolio base can protect you from financial crisis and inflation.
Of course, there’s a risk with investing, but an adviser can help you analyze your risk level based on your current age, planned retirement age, income and financial goals. Long-term investments are historically shown to prove fruitful.
Consider retiring a little later.
The more time you can spend working and contributing, the more money you’ll have access to after retirement. With Social Security, you can retire as early as 62 years old; however, if you wait until 65 or 67, the benefit increases dramatically.
The Social Security monthly benefit will continue to grow at a rate of 8% per year until you reach the age of 70 if you choose not to retire until that age.
For example, an individual may retire at 62 with a monthly benefit amount of $700. If the same person waits to retire until age 67, they may receive $910 per month. The monthly amount could grow to over $1100 if they wait until age 70 to retire.
Spend less after retirement.
It’s important to make sure your retirement funds will last for the rest of your life. You’ll want to have enough money saved to thrive and not just survive during your Golden Years. You’ll need to adopt a budget and spend less money. Once you retire, you may be able to save more since you’ll no longer have to spend funds on commutes to work, work clothes and other similar expenses.
If you’re still years from retiring, consider paying off your mortgage before retirement to save even more money and clear your debt. Remember, you’ll still need to account for annual property taxes in your retirement plan.
Consult with a professional if you need help catching up and growing your savings.