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Welcome back to Invest in You: Ready. Set. Grow's supplemental Money 101 guide to financial wellness as we continue to navigate life during the pandemic. Most Americans aren't prepared for retirement. While most non-retired adults have some type of nest egg, only 36% think their retirement savings are on track, according to the Federal Reserve. Meanwhile, 51% of U.S. households are at risk of not having enough to maintain their living standards in retirement, the Center for Retirement Research at Boston College found.
For some, the pandemic only exacerbated the problem. About 14 million people stopped contributing to their retirement accounts every month as of this March, according to a study from Age Wave and Edward Jones.
Today, we'll take a look at what you can do to get your retirement savings on track.
Thank you for already undertaking your journey to financial wellness. We hope these supplementary lessons help pave the way forward.
Sharon Epperson |
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RETIREMENT SAVINGS
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Start as soon as you can
If you are young, the best thing you can do is start saving for retirement early, since your savings will have the benefit of compound interest. Save consistently.
If you open a Roth individual retirement account at the age of 18, for example, contribute $100 a month for the next 40 years and assume a 12% annual average rate of return, you would end up with approximately $1 million, according to personal finance expert Suze Orman. If you wait 10 years to start, the end result would be about $300,000 by age 58. Online retirement calculators, like AARP's, can help you figure out what you'll need to set aside.
However, if you didn't start young or your contributions were interrupted during the pandemic, don't let that hold you back. Instead of giving up because you don't think you'll ever save enough, take baby steps. Every little bit helps, even if it is $25 a week. You can go higher once you are comfortable doing so.
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Watch your asset allocation
Have the right mix of assets in your portfolio based on your risk tolerance. Stocks, for instance, are riskier than bonds but generate a higher return over time. You may take on more risk when you are younger since your portfolio has time to recover any losses.
As the market goes higher, balance your portfolio to make sure you are sticking with your asset allocation.
Steve Parrish, co-director of The American College For Retirement Income The American College Center for Retirement Income, also suggests considering annuities as part of your overall retirement strategy, since many companies no longer offer pensions. Annuities offer a guaranteed income in retirement.
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Contributions vs. final number
Thinking about a big number you'll need saved by retirement may cause you to freeze or feel overwhelmed.
While U.S. workers believe a median of $500,000 is needed to feel financially secure in their golden years, the final number depends on your specific situation.
Instead, think about saving 15% or 20% of your income in a variety of vehicles, such as a 401(k) plan, savings account and 529 college savings plan. That 20% can also include any employer match you get in your 401(k).
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Consider phased retirement
Consider cutting back your work hours to part-time instead of fully retiring, whether it is at your current job or at a new one. Not only will this bring in income, it will also allow you to delay Social Security for as long as possible so that when you do collect, the benefit will be higher.
Just be sure to pay attention to your employer benefits. If you phase out too much, you may lose your health insurance. Medicare doesn't kick in until age 65.
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"Start saving for retirement while paying down low interest debt…for most people that's student loans, mortgage and car loans. Saving money for retirement means you're putting money in a tax-advantaged account like a 401(k) or IRA."
— Tori Dunlap, Her First 100K Founder
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Inflation concerns
Recent headlines about inflation have some Americans worried about its impact on their retirement savings. However, some don't think about it at all — but they should factor it into their plans.
Have enough diversification in your portfolio, including perhaps some real estate, inflation-adjusted Treasurys or commodities, and stick with your program, advised certified financial planner Abbey Henderson, CEO of Concord, Massachusetts-based Abaris Financial Group.
Social Security is your best inflation hedge since cost-of-living is factored in. A recent estimate put the cost-of-living adjustment for 2022 at 6.1%.
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The bottom line
The earlier you start saving for retirement the better, but don't let the fact that you are behind stop you from doing what you can.
By watching your asset allocation and perhaps making some tweaks in your plans, you can get on track for financial security in retirement.
For more help on making sure you are financially secure in your golden years, click here for Invest in You's ultimate retirement planning guide.
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