Many people assume that their living costs will drop drastically once they retire. But actually, seniors are generally advised to plan on spending 70% to 80% of their former income once their time in the workforce comes to an end. That means you'll need access to a decent chunk of cash to cover your bills.
It also means that if your plan is to simply fall back on Social Security to pay your senior expenses, you may want to rethink it — immediately. Social Security only pays the average senior today $1,543 a month. If that sounds like it won't be nearly enough for you to live on, then there's one thing you'll need to do immediately — start funding a retirement plan.
Don't set yourself up for a struggle
Though it's of course technically possible to live on $1,543 a month, it certainly doesn't make for the most comfortable lifestyle — and it's probably not the lifestyle you want. Instead of relying only on Social Security to provide retirement income, set up an additional income stream with a dedicated savings plan.
In this regard, you have choices. If your employer offers a 401(k) plan, you can sign up and have contributions deducted directly from your paychecks. Currently, 401(k)s max out at $19,500 a year for savers under 50, and $26,000 a year for those 50 and over. Plus, with a 401(k), you may be entitled to an employer match that puts extra money into your account.
If you don't have access to a 401(k), open an IRA. Though IRAs come with lower yearly contribution limits — $6,000 if you're under 50 and $7,000 if you're 50 or older — they typically offer a much wider range of investment choices than 401(k)s, so there's that benefit to enjoy.
Now, say you're midway through your career and haven't yet opened a retirement plan. Are you in trouble?
The good news is that you're not — provided you start playing catch-up immediately. But let's say you're 45 and want to retire at 67, which would actually be your full retirement age for Social Security purposes. If you manage to sock away $500 a month in either a 401(k) or an IRA for the next 22 years, and you invest heavily in stocks so that your money enjoys an 8% average annual return (which is several percentage points below the stock market's average), you'll end up with about $333,000. And if you decide to retire at age 70, you'll be looking at $438,000, assuming that same return and monthly contribution (yes, three more years of saving and investing really can make that much of a difference).
While Social Security might end up paying you a decent amount of money in retirement, for many people, it's simply not enough to live on. If you can't see yourself enjoying a comfortable lifestyle on $1,543 a month, then you'll need to make an effort to build independent savings so you have enough money to enjoy your senior years without worry.
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