So far, 2020 hasn't pulled any punches. The coronavirus pandemic forced many in the U.S. into quarantine, initiated a stock market meltdown, caused a global recession, and led millions to lose their jobs. With all that going on, even the potential invasion of murder hornets had trouble keeping people's attention this summer. The worst part is, no one really knows how the remainder of this awful year will play out economically.
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That uncertainty is problematic for retirement savers, who were largely underfunded before anyone had heard of COVID-19. One 2019 survey by Bankrate concluded that 20% of American workers aren't saving for retirement at all. Another study from Northwestern Mutual reports that 22% of Americans have less than $5,000 in their retirement savings accounts. Given that the U.S. is now struggling through an economic and health crisis, those numbers could easily get worse before they get better.
Whether you'd planned on retiring next year, in 2030, or much later, it's wise to revisit your financial plan in these uncertain economic times. A second round of stock market turbulence is a possibility, for example, as is an ongoing weakness in the job market. Here are four strategies you can implement to improve your retirement outlook during this uncertain time.
1. Diversify your income
You already know you can't rely on Social Security alone to fund a comfortable retirement. But these days, you need to do even more than fund your 401(k). That's because there's a big question mark around the future of income taxes. Given that the government is spending trillions on economic stimulus programs this year, there is a good chance future tax rates will be higher than they are today.
Retirement distributions from your 401(k) are taxable. And it's likely your Social Security income will be taxable, too. If tax rates do rise, you'll appreciate having a nontaxable source of income to help you manage that tax burden in retirement.
The simplest way to create a nontaxable income stream is to contribute to a Roth 401(k) or a Roth IRA if you meet the income requirements. Or make designated Roth contributions to your traditional 401(k) if your plan allows it. Roth contributions aren't tax-deductible in the current tax year, but the earnings and your future retirement distributions are tax-free.
2. Contribute to a health savings account
One report from Bank of America estimates that the average retired couple will spend roughly $300,000 on out-of-pocket medical costs in retirement.
Give yourself a head start on managing those future costs by contributing to a health savings account (HSA). HSA contributions are tax-deductible, your earnings in the account grow tax-free, and withdrawals for medical expenses are also tax-free. Those three tax perks can add up to sizable savings over the course of your retirement. Say you pay an effective tax rate of 16% and you incur $100,000 in health costs. Pulling that money entirely from HSA investment earnings would save you $16,000.
In 2020, you can contribute up to $3,550 to an individual HSA or up to $7,100 to a family HSA. You do not need to spend this money every year, either. Make your contributions, invest them, and see if you can grow that HSA balance to stretch toward that $300,000 benchmark by the time you retire.
3. Get promoted
Increasing your income today also directly benefits your retirement. Ideally, you'd take the bulk of that raise and funnel it into your retirement savings. Plus, your higher salary puts upward pressure on your Social Security benefit. Your benefit amount is calculated by averaging your income from your highest-paid 35 years of working. Raise that average with a big salary today and you raise your benefit, too.
You can quantify the increase by logging into my Social Security and using the retirement benefits calculator.
4. Delay Social Security
If your health and employer allow it, delaying retirement for a few years has serious financial rewards. You'll make more retirement contributions and shorten the timeframe you'll have to live off your savings. Plus, delaying retirement also increases your Social Security benefit.
You can claim Social Security between the ages of 62 and 70, but you don't qualify for your full benefit until you reach Full Retirement Age (FRA). Your FRA is based on your birth year, and you can look it up here. If you claim Social Security earlier than your FRA, your benefit amount is reduced. But the flipside is also true. If you delay your claim until after FRA, your benefit is increased.
The difference in your benefit at age 62 versus age 70 can be substantial, upwards of 70% higher. See your own benefits estimates at 62, FRA, and 70 at my Social Security.
Lock in that retirement
The year 2020 doesn't have to be the one where you gave up on your retirement dreams. Make the right moves now and it might be the year you actually secured those dreams. Start by contributing to a Roth account and a HSA for tax-free distributions later. Then get the most you can from Social Security by raising your hand for a promotion and delaying your claim as long as you can.