We think of retirement as a relaxing, carefree time in our lives when we can do whatever we please, but for many working Americans today, retirement will be more of a nightmare than a dream. Study after study has shown that many Americans are well behind where they should be in terms of retirement savings, and if they don’t take steps today to fix this, they could end up running out of money or working far longer than they planned.
Here are some of the most shocking statistics about Americans’ retirement savings and some advice on how you can get yours back on track.
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1. One in three Americans has less than $5,000 in retirement savings
A Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Whatever the reason behind their lack of savings, the result is the same. When they do begin saving, these individuals will have to set aside larger portions of their income each month to have enough for retirement because their savings will have less time to compound before they need to begin drawing upon them. Alternatively, these workers may need to stay in the workforce a little longer than they planned.
2. The median household retirement savings is $50,000
The latest Transamerica retirement survey says the median retirement savings for all households in the U.S. is $50,000. This number is higher for older generations, with baby boomers having a median of $152,000 in retirement savings and Gen Xers having a median of $66,000. Millennials currently have the lowest median retirement savings at $23,000, but they also have the most time left to save before retirement.
3. Americans are leaving $24 billion in unclaimed 401(k) matches on the table
An employer 401(k) match is free money you can put toward your retirement so you don’t have to spend your own hard-earned cash on it. But many Americans choose not to take advantage of this, resulting in $24 billion in 401(k) matches going unclaimed every year, according to Financial Engines. The survey says that the typical employee misses out on $1,336 of free cash each year, which could amount to nearly $43,000 with compounding over 20 years.
4. 29% of Americans have taken early withdrawals from their retirement accounts
When times get tough, nearly 3 in 10 Americans dip into their retirement savings, according to Transamerica. Common reasons for taking 401(k) loans or hardship withdrawals include paying down debt, unplanned medical expenses, and paying for higher education. These withdrawals may get you through a tough time, but they also hamper the growth of your retirement savings, and you could pay penalties on these distributions if they’re not for a qualified reason. You’re better off setting aside money for emergencies in a separate emergency fund. Aim to have three to six months’ worth of living expenses.
5. 46% of Americans are just guessing at how much money they need for retirement
Nearly half of all workers surveyed in Transamerica’s latest retirement study acknowledged that they were guessing at how much they needed to save for retirement. Only 12% had used a retirement calculator or a worksheet to help them get an accurate estimate. Gen Xers and baby boomers estimated they would need about $500,000 for retirement, while millennials estimated they would need only $400,000. But both estimates are likely to be too low. A MetLife study put the average cost of retirement at $738,400, and it’s not unreasonable to think you’ll need $1 million or more if you reside somewhere with a high cost of living.
How to shore up your retirement savings
If you’re one of the 46% guessing at how much you need for retirement savings, now’s the time to make a real plan. Start by estimating how long you expect to live, and figure high. One in 4 65-year-olds today will live past 90, according to the Social Security Administration, and 1 in 10 will live past 95. Subtract the age at which you plan to retire to get the estimated length of your retirement.
Next, estimate your annual living expenses in retirement and multiply this by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator will do this math for you. Once you have your total estimated retirement cost, subtract from this any money you expect to receive from pensions, Social Security, or employer 401(k) matches. You can estimate your Social Security benefit by creating a My Social Security account. The amount that’s left over is how much you need to save on your own. Your calculator should also give you an estimate of how much you need to save per month to reach your goal.
The next step is to open retirement accounts if you don’t already have them. Your employer may offer a 401(k). Start here, especially if your company matches part of your contributions. If your company doesn’t offer a 401(k), open an IRA instead. Traditional IRAs are tax-deferred, so they reduce your taxable income this year, but you pay taxes on your retirement distributions. Roth IRAs work the opposite way. You pay taxes on your initial contributions, but no taxes on distributions in retirement. Traditional IRAs make more sense if you believe you’re in a higher tax bracket today than you will be in retirement, while Roth IRAs make more sense if you believe you’re in the same or a lower tax bracket today than you will be in retirement.
Aim to contribute as much as your retirement calculator says you should each month, or more if you want an extra cushion. If you can’t save that much now, save as much as you can and try to increase your contributions by 1% of your salary each year. Avoid taking early withdrawals, even if you have a qualified reason, like a first-home purchase. Save for these and emergency expenses in a savings account instead.
The above statistics about Americans’ retirement savings are dire, but you can beat the odds by creating a solid retirement plan, diligently saving, and taking advantage of any employer 401(k) match that’s available.