You may have a retirement date in mind, but your savings will determine whether or not that's actually feasible. You don't want to risk outlasting your money, so it's crucial that you take steps now to keep your retirement plan from going off the rails.
There are several ways to approach this. One of the easiest is to delay your retirement to give you more time to save while simultaneously reducing how much you need to cover your retirement expenses. Approximately 52% of workers expect to delay their retirement, according to a recent MetLife study, but this approach may not appeal to everyone. It may not even be an option for you if a sudden health or family issue forces you to retire early. Fortunately, there are other steps you can take to keep your retirement savings on track. Here are three strategies you can try.
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1. Re-evaluate your retirement plan periodically
You can't just create your retirement plan once and never look at it again. You need to re-evaluate it every year or two to determine whether you need to make any adjustments. Things like an unexpected long-term illness or a divorce can affect how much money you need to save for retirement. Job loss may prevent you from saving anything for retirement for a while, forcing you to increase your future contributions when you get a new job.
By staying on top of these lifestyle changes, you can minimize the toll they take on your retirement plan. Recalculate your retirement living expenses based on your latest estimates, and don't forget to add 3% per year for inflation. A retirement calculator can help with this. Then, compare your newest estimate to the retirement plan you've been following and make any adjustments to your monthly savings if needed.
If you don't have a retirement plan at all, now's the time to make one. First, estimate your life expectancy and then subtract the age you plan to retire at to get the estimated length of your retirement. Then, total up your estimated annual living expenses in retirement, including housing costs, utility bills, insurance, groceries, and more. Multiply this by the number of years of your retirement, adding 3% annually for inflation. Then, subtract from the total any money you expect to receive from Social Security, a pension, or an employer 401(k) match. Here's a comprehensive guide to walk you through all of this.
2. Look for ways to cut costs
You can use this strategy in one of two ways. First, you can look for ways to reduce your expenses today to free up more money for retirement savings. Cancel any subscription services you don't use, limit discretionary purchases, cook more instead of eating out, and find ways to entertain yourself and your family that don't involve spending a lot of money. Take the extra money you save and put it toward your retirement. Even if all you can spare is an extra $50 per month, that could add up to nearly $68,000 over 30 years, assuming an 8% rate of return -- enough to cover a year or two of living expenses in retirement.
Another option is to find ways to reduce your expenses in retirement. You could plan to downsize your home, move to a more affordable neighborhood, or reconsider your travel plans. It's difficult to predict how much this will save you because there are a lot of individual factors involved, but anything that you can do to reduce your expenses in retirement will help your existing savings stretch further.
3. Pay attention to investment fees
All retirement accounts charge administrative fees, and you're probably paying fees every time you buy or sell an asset. Some investment products, like mutual funds, also have expense ratios, which are annual fees charged as a percentage of your assets. All of these costs can eat into your profits over time. A 1.3% 401(k) fee could cost you nearly $100,000 over 42 years, compared to a 0.25% 401(k) fee, according to the Center for American Progress. This could force you to work years longer to hit your target savings goal.
If you're not sure how much you're paying in retirement account fees, the first step is to find out. Talk with your retirement plan administrator or your company's HR department. You can also read your plan summary or the prospectus for your investments. Ideally, you shouldn't pay more than 1% of your assets in fees each year, and the lower you can keep those fees, the better.
You may not be able to control your plan's administrative fees, which cover things like recordkeeping and special services like 401(k) rollovers, but you can control what you invest your money in. Consider moving your savings to lower-cost investment products, like index funds. These are passively managed mutual funds that track a market index, and they're popular because they typically generate substantial returns for a low fee. If your 401(k) plan doesn't offer any low-cost investment products and your employer refuses to add any, consider moving your money to an IRA where you'll have more investment choices and lower fees, unless your 401(k) includes an employer match that covers what you pay in fees each year.
Depending on how far off you are from your savings goal, you may still have to delay your retirement a little bit. But by employing some of the strategies above, you can reduce the extra time you need to work in order to hit that goal.
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