Whether you’re living paycheck to paycheck or have been blindsided with unexpected expenses, hitting the big 4-0 with nothing in the bank for retirement isn’t ideal.
Before we get into what you should do about it, this might make you feel a tiny bit better: lots of other people are in the same predicament. Almost half the respondents of the Federal Reserve’s latest Report on the Economic Well-Being of U.S. Households said they had no financial plan for retirement, and U.S. News reports that about 36 percent of American workers have less than $1,000 saved for their post-work years.
The ‘Tiny House Movement’ and ‘Binge Saving’: The New Retirement
As many as one in five Americans nearing retirement haven’t saved a dime.
Regardless of your why, it’s not too late to take a hard look at your finances, devise a plan, and get some money in the bank. Here’s a step-by-step guide to whipping your retirement savings into shape.
Step One: Crunch Some Numbers to Outline a Basic Retirement Plan
To create a retirement plan that will guide you going forward, you’ll need four key numbers:
- the age at which you want to retire
- the number of years you’ll depend on your retirement savings
- an annual estimate of living expenses in retirement
- your current savings.
Since these numbers are a vital part of your plan, let’s talk about how to identify them.
While many people think of 65 as the “normal” retirement age, it’s not a definitive age. As people live longer, some choose to work into their late 60s and beyond. Taking into account your age, salary, expenses and how long you’re likely to live, you can figure out what age is a realistic retirement target.
Remember to consider any potential income you might have in retirement. Will you have a pension, or will you depend on Social Security? To calculate your Social Security payments, enter your birthdate and current salary into this Social Security calculator from the U.S. Department of Labor. Test out different retirement dates to see how retiring a year or two earlier or later could affect your monthly payments. For example, a 40-year-old earning $50,000 a year can expect benefits of $1,517 per month if she retires at age 65, or $1,766 if she waits until age 67.
Now run your numbers through the AARP’s Retirement Calculator. Enter your age, salary and lifestyle details, and it creates a graph that shows your estimated retirement income and projected living expenses, as well as any gap between the two. Adjusting your planned retirement age helps show how working an additional year or two could affect your savings.
AARP Retirement Calculator – Retire The Way You Want – AARP
Calculate how much retirement income you need from your savings, 401(k), pension, Social Security…
Let’s look at an example: a 40 year old, unmarried female investor who earns $50,000 per year and has no retirement savings is looking at a significant gap between her retirement income (only Social Security) and projected expenses. Even delaying retirement until she’s 67 doesn’t close the gap; she’ll need to rely on savings as well.
How much money should you be saving? Morningstar’s Retirement Savings Calculator uses your age, salary and current savings to determine how much of your annual income should go toward retirement savings. Be prepared for a wake-up call: a 40-year-old earning $60,000 should aim to save 17 percent of his annual income — and that’s assuming he or she already has $10,000 in the bank.
If you’re not sure where that money is going to come from, it’s time for Step two.
Step Two: Assess and Trim Your Living Expenses
Seeing a gap between your estimated retirement income and living expenses can be sobering. To start closing that gap, let’s take a hard look at your spending.
Categorize your expenses into “needs”, “wants”, and “savings”. Needs are basic essentials like food, housing and utilities. Wants are less necessary expenditures like clothing, travel or entertainment — and they’re your first target for cuts.
Slash spending from your “wants” category by identifying and cutting out unnecessary expenditures. These will be different for everyone; for ideas, check out the responses from Lifehacker readers when we asked what people tend to cut back on first
Ask the Readers: Cut your expenses when things are tight?
When Northwest Airlines laid off 60 employees earlier this month, the pink slips were accompanied…
Don’t be too harsh, since eliminating everything you enjoy is unsustainable, but be as ruthless as possible. You might not quit Starbucks coffee cold turkey, but maybe you can brew their beans at home instead of hitting the drive-through every morning.
4 Sneaky Starbucks Tricks That Can Save You Big Money
You don’t have to quit Starbucks to save money on coffee. Use these Starbucks hacks to maximize…
Next, target your “needs” to see what can be trimmed. Use this bill-by-bill savings guide to find savings on everything from your cellphone bill to your utilities. Consider other small changes, too, as those can add up to a big difference. Can you mow the lawn in exchange for paying less rent? What about choosing lower-cost meals (like ones from Leanne Brown’s Good and Cheap cookbook)? Have you checked your home assessment for a chance to lower your property taxes?
If you’re ready for a big change, consider downsizing your home. Buying a cheaper residence frees up more of your money and often decreases your bills, as Steve Gillman explained when describing why he traded his house for a cheaper condo. Bonus: not all your stuff will fit in the new place, and that might be a good thing. Sell it for extra cash, or donate it for a tax write-off.
Savings aren’t immune, either. While you might not have banked any money toward retirement, you might have been planning for a vacation or a new car. Earmark that money to your retirement instead.
Finally, if you’re still supporting your adult children, it’s time to tell them they’re on their own. It sounds harsh, but as U.S. News points out, they have many more years for their own financial planning.
Total the amount you’ll save each month from these changes. This is your first retirement contribution.
Think your living expenses are already as trim as possible? Then move onto Step three.
Step Three: Consider New Opportunities to Earn
While cutting spending can help you find a little extra money to put toward retirement, there’s only so…