- By: Maurie Backman for The Motley Fool -
Since Social Security doesn't provide enough income to sustain seniors by itself, it's on working Americans to save for the future independently. But a new report by the U.S. Government Accountability Office (GAO) paints a pretty bleak picture in this regard: As of 2016, only 52% of workers 55 and older were saving in a 401(k) or IRA. This means nearly half of older Americans are barreling toward retirement with no personal savings to speak of.
To be fair, the GAO did state that about 40% of the households covered in its study had access to a pension through their employers. Still, 29% of older Americans had neither a pension nor savings -- and that's a pretty dire combination.
If you're approaching retirement with little to no money to your name, it's imperative that you start saving immediately. Otherwise, you'll risk falling short in retirement and struggling financially for years to come.
You must have savings
Many workers underestimate the importance of retirement savings, largely because they assume that they'll mostly manage to get by on Social Security. But here's the reality: Social Security will only replace about 40% of the average worker's pre-retirement income. Most seniors, however, need roughly double that amount to live comfortably, and when you think about the expenses you'll face once you stop working, that figure really makes sense.
While you might manage to pay off your mortgage in time for retirement, and you'll shed your commuting costs once your career ends, the bulk of your remaining expenses, like food, utilities, and clothing, will stay the same. Furthermore, some expenses, like healthcare and leisure, will likely increase, since health issues tend to arise as we age and not having a job to go to means needing more options for entertainment. As such, you should really expect to need a good 70% to 80% of your former income to live a decent lifestyle in retirement. And you need savings to make that happen.
Making up for lost time
If you're in your mid-50s or older, the truth is that you don't have a ton of time to catch up on retirement savings. But that doesn't mean all is lost. If you start maxing out your retirement plan effective immediately, you'll have a chance to build some savings before your career ends. Currently, anyone 50 and older can contribute up to $7,000 a year to an IRA, and $25,000 a year to a 401(k). Max out the former for 10 years, and you'll wind up with about $97,000 if you invest your savings at an average annual 7% return (a reasonable assumption for a 10-year investment window). That's not a ton of money, but it's better than nothing.
Maxing out a 401(k) for 10 years will yield much more impressive results -- $345,000, all other things being equal. Of course, going from saving nothing to setting aside $25,000 a year may not be feasible for the typical older worker, but if you're able to drastically reduce your expenses to free up that much cash, you stand to benefit tremendously.
Even if you can't max out a 401(k) at $25,000 a year, you might reach some sort of middle ground between that extreme and saving a mere $7,000 in an IRA. For example, saving $1,000 a month, or $12,000 a year, over a decade will leave you with $166,000, assuming that same 7% return on investment. And if cutting back on living expenses isn't enough to help you hit that target, consider getting yourself a second job on top of your regular one. Of the millions of Americans who work a side hustle, 14% do so for the express purpose of funding a retirement account.
Finally, if you're nearing retirement with hardly any savings, it pays to consider postponing that milestone and working a few extra years. Doing so will allow you to bank some extra money, all the while leaving your limited savings untouched for longer. Furthermore, extending your career might allow you to delay Social Security past your full retirement age (which, if you were born in 1960 or later, is 67), thereby boosting your benefits in the process.
Entering retirement without savings is a scary prospect. If that's the scenario you're facing, come up with a savings plan immediately and start working toward it. Otherwise, you might find that your golden years are nothing more than one extended financial struggle.