Will a Lack of Savings Cause a Retirement Crisis After You Retire?

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Sooner or later, everyone is going to start retirement. Even those planning on working longer may have to retire sooner than expected. Whenever that time comes, studies indicate that most people are not financially prepared for it and may be heading for a financial crisis.

Although different numbers are circulated online as to how much you might need to retire, it depends on what you regularly spend each month and what your debt is in retirement. Another factor is how much regular income you will get after you retire and what your taxes will be.

Social Security May Be Reduced in 10 Years

In retirement, many people count on Social Security being there to make up most of their needs. Although the benefits are what most workers can count on, it will not be enough. Since its inception, it was only intended to supplement other income sources once you retire.

A shortage of funds is expected to occur in about ten years. Fox Business reports that the shortage will be about 17 percent in 2035. Earlier projections thought it would happen in 2034, but since more people have joined the workforce recently, it has helped ensure another year of normal benefits.

People Are Living Longer

The life expectancy of Americans continues to be on the rise. People who retire at 65 can now expect to live to about 80 (men 78, women 83). Some individuals live to 100 and beyond, so it can be hard to predict how long you will be around.

Misconceptions People Have About Retirement

Multiple surveys have revealed that people have serious misconceptions about what they will need or have in retirement. Debt reports that as many as 25 percent of baby boomers think Medicare will cover long-term care. Unfortunately, it will not, but it will cover some short-term stays.

Another misconception is that many people approaching retirement age have no idea what it will cost to have a comfortable retirement. It may be why only 26 percent of workers have a backup plan in case they are forced into an early retirement—due to health complications, job loss, or becoming unable to work due to an injury.

Avoid Putting Off Saving for Retirement

The two ingredients mentioned above—predicted shortfalls in Social Security and longer lifespans—make the need to have a retirement savings plan more urgent than ever. It is becoming a crisis because people are finding out too late that they do not have nearly enough money saved.

The cost of living is not getting any cheaper. Inflation is high, and so are prices on everything. It means that you have no time to waste to start building your retirement funds. Compound interest can increase your savings to a comfortable level, but you must act soon because it takes years—but it will be there when you retire.

How to Reduce Your Need for Income During Retirement

• Avoid Claiming Social Security Too Soon

Even though Social Security benefits may be reduced in the future, it does not mean you should claim it as soon as you turn 62 or 65. Every year, your benefits increase by about 8 percent if you wait. Once you start getting benefits, they are unlikely to change except for cost-of-living adjustments. If you think you will not have enough for a comfortable retirement, wait longer to claim it. The more you get from Social Security, the less you need from other sources.

• Downsize

Reducing or eliminating your debt before you retire will free you to do more and travel more once you retire. Pay off your mortgage, car loan, and any credit card debt.

Downsizing your home will also help reduce your debt. Selling your current home and buying a smaller one may help you save more money. While all states have property taxes, some states charge lower rates. RetireGuide reports that 12 states do not charge any property tax to seniors. They include New Hampshire, Alabama, Alaska, South Dakota, Florida, Georgia, New York, Hawaii, Mississippi, South Carolina, Washington, and Texas.

• Move to a State With Less Taxes

Although you should not move until you have carefully crunched some numbers to ensure it is a good decision, it is much cheaper to live in some states. Other states may not have an income tax, but some will tax pensions and Social Security benefits.

A Guideline for Savings

More and more financial advisors, the MotleyFool says, advise that you save a minimum of 15 percent of your income during your working life. They say that if you have $1 million saved by the time you retire, you could safely withdraw 3 percent per year.

Advisors used to say 4 percent, but a recent instability in the economy has made them more reluctant to recommend the higher percentage. Interest rates have been lower than usual, which means it takes longer to earn a similar amount.

Put Retirement Money Into After-Tax Accounts

Two of the most popular retirement savings accounts are the 401(k) and the individual retirement account (IRA). If your employer offers matching accounts on a 401(k), take advantage of it and put in at least as much as they are willing to match. Also, be sure to take part in the investments they offer and select your risk level according to your age—a higher age should equal lower risk. A high-yield savings account may be another option.

If you can, put some of your retirement money into a Roth 401(k) or a Roth IRA. You will pay taxes on all contributions to the account and will not get a tax deduction. The advantage is that your retirement income in the account will not go to taxes when you need it most.

Careful retirement planning is required to ensure you will have enough to retire comfortably. You only have one chance to get the numbers right. Use a retirement calculator for more accurate estimates or talk to a financial advisor for correct information and best tips.

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