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A retirement crisis is looming, whether we want to acknowledge it or not.
The majority of Americans are simply not on track to have sufficient savings to retire or fund their living costs in later years—especially baby boomers who have an average of $202,000 saved in retirement accounts. This is particularly alarming as the current level of benefits from entitlement programs, such as Social Security and Medicare, will not be enough to close the retirement funding gap. And these programs are facing funding shortages and insolvency risks, putting future benefits in serious jeopardy.
Read: How to invest your IRA contribution: 3 strategies to fit your mind-set in a turbulent market
Every generational cohort is behind when it comes to retirement savings. While younger investors still have time to course-correct and increase their retirement savings rates, the generation that is nearing retirement does not have much time to catch up. And last year’s poor performance in the financial markets has left many with portfolios down 20%, or worse. Prospective retirees whose savings have fallen short will need to muster a variety of resources and take significant austerity measures just to meet the basic needs of shelter, food, and medical care.
Macro headwinds are hurting retirees
While this crisis has been brewing for some time, the recent macroeconomic environment—exacerbated by the recent crisis of confidence in the banking system—has accelerated the timeline of consequences that will result in generational insolvency for many.
Inflation was manageable for a generation of savers, but its recent surge has wreaked havoc on household purchasing power. Inflation has an outsize impact on those on fixed incomes. The Federal Reserve has been steadfast in tamping down inflation by lowering demand through rate hikes. This demand destruction will result in weakness in the labor market, with job losses that could be substantial, and a recession will likely follow.
Potential retirees with insufficient or zero savings will have a hard time increasing or initiating a savings plan as inflation eats into their household budget, while the Fed’s quantitative tightening will pressure a still-overvalued stock market, eroding 401(k) balances. Households could fall further behind if they lose income in a layoff.
Take action now
Being able to retire comfortably is a luxury that only a few diligent savers will be able to afford in this macro environment. With insufficient retirement savings, many Americans will be required to adopt severe austerity measures just to obtain the necessities like food, shelter, and medical care.
If you are eyeing retirement and your current savings will be insufficient for you to fund a comfortable lifestyle, do not wait any longer to begin catch-up measures. Now is the time to start planning, saving more, and tracking your progress.
Develop a plan
The closer you are to retirement, and the farther you find yourself behind in saving, the more important it is to evaluate your expected expense footprint for each cost-of-living category and match your available resources to each category.
You may have first started retirement planning by estimating your monthly budget based on a percentage of your current budget, and calculating how much you’ll need in retirement accounts to cover that amount. But you’ll need to get more specific now.
Evaluating your housing costs, for instance, may help you identify ways of reducing those expenses. Can you downsize your current home? Or can you relocate to a low-tax burden state? Can you make a weekly meal plan to avoid impulse purchases or eating out, shop your pantry or buy in bulk to help reduce your grocery budget?
Consider regular and unexpected expenses when evaluating your retirement budget. Some often-overlooked expenses that can save from larger future costs include:
· Long-term-care insurance
· Life insurance
· Medigap Insurance for those 65 or older
If you’re unsure about developing your plan, don’t go it alone. Consult a financial adviser to help set goals. People who work with financial advisers generally feel more confident about their retirement plans and future.
Catch up on savings
If you’ve evaluated your retirement expense footprint and available resources, and you have found that your expected savings will fall short, then you will need to devote more to savings. Here are some ways to accomplish this:
· Create new streams of income and funnel that income into retirement savings. This may be a part-time job or a small business. The world of remote work has opened up new flexible possibilities for those looking for short-term contract jobs and gig work opportunities to build additional income streams.
· Reduce your current expense footprint. Downsizing may be an option for empty-nesters. Remote work has allowed some workers to move to areas that offer an overall lower cost of living and an opportunity to divert any recovered monthly expenses into retirement accounts.
· Remain in the workforce for longer. Delaying your retirement can allow your investments to compound longer. If full-time work becomes too difficult, part-time jobs can help cover expenses until you’re ready for full retirement.
· Take advantage of retirement account catch-up contributions. For IRAs, workers ages 50 and up can contribute an additional $1,000 per year on top of the regular contribution limit ($6,500 for 2023). The catch-up amount and contribution limits will now both be increased with inflation starting in 2024. And, starting in 2025, employees ages 60 to 63 will be eligible to contribute at least $10,000 over the annual 401(k) contribution limit.
· Educate yourself. It’s never too late to learn about the ins and outs of retirement benefits, investing, the markets or other personal finance topics. Empower yourself with resources such as podcasts, YouTube shows, books or helpful articles.
· Reduce your odds of being laid off. Whether or not you perceive your job to be in imminent jeopardy and you’re still actively saving for retirement, take steps to reduce your odds of becoming the victim of a layoff.
Track your progress
Conjuring up rosy retirement goals won’t get you there. You must execute your plan. Good execution doesn’t mean getting everything right, but it does require you to track your progress. You need to know when deviations occur so that you can make adjustments.
As you track, iterate your plan. While you don’t want to continually move the goal posts, you need to keep up with changes in your life and the current macro environment. Tracking your progress and updating your plan can give you new insights and inspire new ways to increase your savings rate. It can also deal with the inevitable setbacks and life changes that happen.
Remember, you cannot move what you cannot measure. Luckily, tracking your income and expenses has never been easier. There are several excellent budget planners online, such as Quicken or Mint, that integrate with your accounts, giving you quick and easy insights as you work toward your goals.
A hidden resource—social capital
Social capital is an essential resource in retirement, often as underinvested as retirement accounts. Building social capital means investing in your relationships with others. Who will you support in times of need, and who will in turn support you? Connect with family, friends and neighbors—what can you do to support each other financially and emotionally? Exchanging child care, helping with yard work and meal prep, and other community support activities are ways to utilize social capital, offsetting individual burdens by building community.
You can also enhance your retirement by improving your health and fitness, learning a new skill, and working toward a more energy-efficient lifestyle—all of these are life-enhancing pursuits worth investing in. Developing strong social capital and broader resilience now can pay dividends later, regardless of your retirement budget.
Adam Taggart is the chief executive and founder of Wealthion, a financial brand on YouTube with more than 5.6 million monthly views. Taggart has 30 years of diverse work experience, from investment banker for Merrill Lynch to vice president of marketing for North America at Yahoo Finance. He is the author of “Prosper!: How To Prepare For The Future & Create A World Worth Inheriting.”
