Understanding how much money you will need in retirement is a complex task, as it involves factors that are both within your control, such as lifestyle choices, and factors that are difficult to predict, like life expectancy. Morningstar, a leading investing research firm, has recently released an updated model of U.S. retirement outcomes, which takes into account spending, investing, and life expectancy data, among other factors. The model predicts that 45% of U.S. households will run short of money in retirement, leading many to return to work, go into debt, or cut costs to make ends meet.
If you are still in the early stages of saving for retirement, there are two key strategies that can significantly increase your chances of having enough money to sustain your lifestyle in retirement. The first is investing in a workplace retirement account, such as a 401(k) or 403(b). Morningstar found that 79% of Americans who participate in a defined-contribution plan for at least 20 years will have enough money to cover their expenses in retirement. The second strategy is delaying retirement. Morningstar projects that 45% of households will fall short in retirement if they retire at age 65, compared to only 28% if they delay retirement until age 70.
According to Jack VanDerhei, director of retirement studies at Morningstar Retirement, the biggest obstacles to a successful retirement are spending too much and saving too little. The conventional retirement savings model involves saving in a tax-advantaged account throughout your working years, then relying on a combination of Social Security, pension income, and portfolio withdrawals in retirement. The key to a successful retirement is maximizing your Social Security benefits and building a large enough portfolio to sustain your income indefinitely.
One of the best ways to increase your chances of fully funding your retirement is to save in a workplace retirement account. By enrolling in a 401(k) or similar plan, you can have money automatically deducted from your paycheck and invested in your portfolio. This not only ensures that you are consistently saving for retirement, but also allows you to benefit from employer matching contributions and the power of compounding interest. If you do not have access to a workplace retirement plan, saving in an IRA can also be an effective way to prepare for retirement.
Another strategy to boost your retirement sustainability is to delay retirement if possible. Working longer has a two-fold benefit: it reduces the amount of time you need your money to last in retirement, and it increases your Social Security benefits. Full benefits are available at age 67 for those born after 1960, but delaying claiming benefits until age 70 can result in an 8% increase in benefits for each year of delay. Even if you are unable to work until age 70, working part-time or extending your retirement age can still have a positive impact on your overall retirement readiness.
In conclusion, preparing for retirement requires careful planning and consideration of various factors. By saving in a workplace retirement account, delaying retirement if possible, and following sound financial strategies, you can increase your chances of fully funding your retirement and enjoying financial security in your later years. Morningstar’s research provides valuable insights into the challenges and opportunities of retirement planning, and offers practical advice for individuals looking to ensure a comfortable and secure retirement.
