It’s always worthwhile thinking about your retirement savings, but a new study has revealed that some of us might not be thinking about ours enough. This study found that nearly 50% of Americans will struggle financially if they retire at 65. Let’s find out what’s going on.
The Research
As part of the study, Morningstar created a model that estimates how much money people will have when they retire. The lead researchers, Jack VanDerhei and Spencer Look, put it together using real data about what people earn and how they save for retirement. The aim was to predict people’s Social Security, pension, and 401(k) savings by the time they hit retirement age.
How Much Will You Spend When You Retire?
Of course, it’s not just about how much you have saved that’s important, but also about what you’ll spend. To do this, Morningstar used the Health and Retirement Study to guess people’s future bills so they could match what people will likely spend with what they have. Honestly, that’s pretty useful to know.
45% Might Not Make It
Unfortunately, the study found that around 45% of us won’t have enough to cover our retirement costs. As such, around half of the population will have to rethink those images of beachside retirements and focus more on the reality of budgeting. As difficult as it sounds, knowing this now gives us time to plan better and maybe save a little extra.
Tweaking the Numbers
If you adjust the numbers slightly, then fewer people end up short. For example, if you assume you’ll only need 80% of your income from the big three, which are Social Security, pensions, and retirement accounts, then the figure drops from 45% down to 31%. Find what fits your life, and perhaps try being a bit more conservative with your spending plans.
Social Security May Not Be Enough
Many retirees rely just on Social Security, but that’s not what it was meant for. Your Social Security is meant to supplement retirement savings instead of replacing them entirely, which is why retirees without significant additional savings may struggle to maintain their lifestyle. To avoid this, you have to build up personal savings early.
Counting All Your Income
Of course, your pension or Social Security isn’t your only income stream during retirement. Many retirees also get cash from part-time jobs or investments, which can help close the gap between income and spending. The most important thing to remember is that you shouldn’t put all your eggs in one basket, as a mix of sources could keep you afloat when one falls short.
How Retirees Really Use Their Money
Lower-income retirees also tend to rely more on money from outside traditional retirement accounts, which could mean that this group needs more targeted help to secure their financial future. The government may need to identify where the actual financial gaps are so it can create more targeted programs. This could be hugely beneficial for lower-income retirees.
Younger Generations Might Be Better Off
The news gets better for younger people as the figure drops for Gen X to Gen Z, with baby boomers being the worst off. 52% of them are likely to run out of money during retirement. It’s not clear why things are improving for younger people, although this could be because they’re more informed about needing to save or perhaps because of changes in the economy.
More People Are Saving Now
Over the last 30 years, more Americans have put money into retirement plans, which is definitely a move in the right direction for making sure everyone gets to enjoy their golden years. This increase is likely because people are more worried about their financial security in retirement, pushing more people to act. Either way, it’s definitely a good thing.
Working a Bit Longer Helps
A lot of people are choosing to work a bit longer these days because staying employed means you’re not tapping into your retirement funds as early. If anything, you’re probably adding a bit more to them instead. Staying in the workforce also means you’ll keep your skills and your mind sharp, which have plenty of their own benefits as you get older.
What If Social Security Runs Out?
One big concern is the idea of Social Security running out of cash, which could mean a 20% cut in benefits. If that happens, it’s going to be much harder for many seniors to make ends meet, meaning it’s pretty important for them to have a backup plan. This could be through additional income streams, like investments or even a part-time job in retirement.
Auto-Enroll Could Be a Lifesaver
Some people believe companies should make their workers automatically enroll in retirement plans, as it could help more people start saving without having to think about it too much. This could really help bridge the retirement gap. Best of all, auto-enrollment means you’re less likely to opt out, and the chances are higher that you’ll build up some decent savings.
The Model Will Keep Evolving
Of course, you should remember that this model is based on predictions, so there’s no guarantee that the results are correct. As data changes and new trends pop up, Morningstar will adjust the model to keep everything up to date. Even though today’s predictions might look scary, improvements in the model could bring us some good news down the line.
The Value of Continuing Education in Retirement
Your finances aren’t the only important thing in retirement, as many retirees are turning to continuing education to stay active and engaged. Universities often have special programs and courses designed just for them. Whether you’re learning a new language or some history, continual education will give you some mental stimulation and can be incredibly fulfilling.
Adjusting to a New Social Scene
After retiring, many retirees find that their social relationships change quite dramatically. Work friends may fade away, and many of them feel the need to cultivate new relationships, which you can do by joining clubs or volunteering. You can even take part in some community activities to meet new people.
The Rise of Gig Work Among Retirees
An increasing number of retirees are turning to gig work to support their income and keep themselves busy. Some are doing freelance writing, while others are consulting, but either way, gig work gives them the flexibility and opportunity to use their skills in a less demanding context. It’s a win-win.
Exploring Flexible Retirement Options
You can also try doing a phased retirement program, which allows you to gradually reduce your work hours as you transition into full retirement. This kind of program is pretty useful because it’s not a sudden change, and it can benefit you both financially and psychologically. It may not work for everyone, but it’s definitely worth considering.
The Impact of Inflation
Inflation is another thing to worry about, as it can mean your savings disappear faster than you planned. If your pension and Social Security don’t keep up with rising prices, what you buy today might not be what you can afford tomorrow. As such, you’ll have to manage your retirement funds with inflation in mind.