Saving for Retirement Is Getting Harder. Here’s What to Do About It.

No, you’re not imagining it. Your parents’ and grandparents’ generations had it a lot easier when it comes to retirement savings. Over the years, new obstacles have cropped up that have made saving enough a much more daunting prospect than it used to be. I don’t think I need to explain how the pandemic has hurt people’s ability to save, but it’s far from the only challenge today’s workers face. Here’s a look at four more and what you can do about them.

Longer life expectancies

People are living longer than they used to, and that is projected to continue, with average life expectancies estimated to grow by nearly six years between now and 2060. Average retirement age is also rising slowly, but if workers continue to retire in their early 60s as has been the trend, it’s possible they could experience longer retirements than previous generations.

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Longer retirements require larger nest eggs, at least if you want to maintain a reasonable quality of life. So today’s workers have to contribute more to their retirement accounts each year. That’s not always easy to do, especially in a recession. When it’s not possible, the next-best thing you can do is push back your retirement date. This gives you additional time to save and reduces the length of your retirement so you need less money.

The demise of pension plans

Many employers used to offer pensions to their employees, which provided a steady source of monthly retirement income regardless of how long the employee lived. These have fallen out of favor because they’re a lot riskier for the employer than the 401(k). Pension payments are guaranteed, and if the pension’s investments don’t do well enough to cover the benefits owed, the employer has to pay the difference out of its own pocket.

A 401(k) shifts most of the burden of retirement savings to the employee, though some employers offer a 401(k) match. Take advantage of this if you can. It’s no pension, but even a few thousand dollars a year is worth it. A $2,000 match you earn this year could be worth over $21,000 in 35 years if you earn a 7% average annual rate of return. Coupled with Social Security, that could be enough to cover a year of retirement expenses for some people.

Social Security’s diminishing buying power

Social Security isn’t going to disappear, at least not anytime soon, but today’s workers won’t be able to count on it as much as today’s retirees. The program sees cost-of-living adjustments (COLAs) almost every year, but these usually aren’t enough to keep pace with inflation. So you can’t buy as much with your Social Security check as you used to be able to. And that forces you to save more on your own so you can afford the lifestyle you want.

You can’t do anything about Social Security’s COLAs, but there are things you can do to influence the size of your checks starting right now. First, make sure you work for at least 35 years, and longer if you can. The government looks at your average monthly income over your 35 highest-earning years, adjusted for inflation, when calculating your benefit. People typically earn more later in their careers, so working longer usually translates to larger Social Security checks.

You should also think carefully about when you plan to sign up for benefits. Unless you believe you won’t live long due to a health issue, you’ll usually get more money overall if you wait to claim benefits until at least your full retirement age (FRA). You can also delay until 70 if you want the largest checks you’re entitled to. You’ll have to fund retirement on your own for a few years or work a little longer, but then when you do start benefits, your checks will cover more.

Skyrocketing healthcare costs

Everything gets more expensive over time, but over the past few decades, healthcare costs have risen 70% faster than the consumer price index (CPI). Translation: Healthcare is getting a lot more expensive a lot faster than your other living expenses. And since old age and declining health often go hand in hand, this hits retirees the hardest.

Hopefully you won’t need a ton of medical care in retirement, but you’ll probably need to budget more for retirement healthcare than previous generations just to be safe. A health savings account (HSA) is a great place to stash this cash, because your contributions reduce your tax bill and you won’t pay any taxes on these funds at all if you use them for non-elective medical care.

You should also make sure you have enough insurance coverage in retirement. Medicare will cover some, but you’ll need a Medicare supplement plan or plenty of personal savings to cover what it doesn’t. Additional insurance will require you to budget for another monthly payment, but this might be easier than trying to handle unexpected expenses on your own when they arise.

How to afford a comfortable retirement

Saving for retirement is hard. But if you ever want to quit the workforce and live comfortably, you have to find a way. The first step is to estimate how much you need for retirement. Plan for a long life and give yourself a little cushion in your budget just in case you run into unforeseen costs.

Once you know that, you can determine how much you must save per month to hit your goal. If you’re not able to save enough, see if you can alter your spending to free up some extra cash. Or go back to the drawing board and see if delaying retirement or making other changes to your plan can make it more affordable for you.

Finally, you have to decide where you’re going to put your savings. A workplace retirement plan is a good start, especially if your company matches some of your contributions. You could also save in an IRA. Even an HSA is a great place to stash some extra cash for retirement if you qualify.

Stick to your plan as best you can and look it over once per year to check if you’re still on track. Retiring comfortably takes a lot of money, but careful planning is just as important, so you can’t just throw money at your future and forget about it. The more thought you put into your retirement, the easier it will be to get there.

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