The COVID-19 crisis has caused many people to change their way of thinking and spend their money. In fact, many people have had no choice but to pause contributions to the retirement plan due to the pandemic. Therefore, it is encouraging to hear that 72% of Americans plan to prioritize their savings once the crisis is over, according to a recent poll by TD Ameritrade. And that’s an important goal to aim for regardless of your age.
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The importance of saving for retirement
Why do you need a savings egg for retirement? It’s simple: Social Security won’t provide enough financial support during your golden years. Today’s average beneficiary raises around $ 1,500 a month, or $ 18,000 a year, in benefits, which isn’t a lot of money to live on, especially when you consider the cost of health care during retirement, which can be astronomical even if your health itself is fine.
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Here’s another way to look at it: Social Security will generally replace about 40% of your pre-retirement income if you have an average income. However, most older people need more than 70% to 80% of their previous earnings to live comfortably. After all, while your house may be paid in time for retirement and you may save money on commuting costs, the rest of your bills will be largely the same. And in some cases, think about medical care, they are likely to go up. As such, you need savings to close the gap between what Social Security will pay you and the level of income you really need to maintain a decent quality of life.
How to Achieve Your Retirement Savings Goals
Right now, you may be dealing with loss of income during the pandemic. Or you can focus on short-term needs: building up your emergency fund, paying off high-interest debt, and doing other things to protect yourself over the next six months to a year. However, once the pandemic ends, it pays to pay serious attention to your retirement plan.
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A good way to make sure you stay on the savings path is to make the process automatic, so once you’re looking at a stable paycheck and your immediate financial concerns are addressed, sign up to have money allocated to 401 from your employer (k), or find an IRA with an automatic transfer feature that allows you to move money directly from your checking account to your retirement plan on a regular basis. Automating the savings process will eliminate the temptation to spend that money elsewhere, increasing the chances that you will end up saving the amount you want.
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How much should you be saving? Well, it depends on your age and your existing IRA or your 401 (k) balance. As a general rule, it’s wise to set aside 15% to 20% of your income for retirement purposes, but if you’re already 40 or older and still don’t have a lot of savings, you may want to aim even higher. And on the other hand, 15% may be overkill for you, and that’s fine. In that case, save as much as you can once your income stabilizes, and then try to improve over time, such as depositing your annual increases.
An estimated 37% of Americans did not regularly contribute to a retirement account before the pandemic. If you were one of them, now may not be the time to take on that added challenge, especially if you’re having trouble with your immediate bills. But once the crisis is over, it’s definitely worth focusing your attention on creating wealth for retirement, because you absolutely need it.
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