It’s no secret that Americans are behind on retirement savings – or at the very least, they feel like they are. According to one survey, 56% of Americans are concerned about their ability to save enough to fund a secure retirement. So if you’re feeling worried about the size of your nest egg, you can rest assured that you’re not alone.
Below I cover the top 3 reasons why people fall behind on retirement savings. Fortunately, there are things you can do to catch up if you fall into one or more of these categories, which are also included below. While it’s never too late to start saving for retirement, it will be easier to save enough for the retirement you desire the sooner you take action.
1. Loss of Income
It may seem obvious that a loss of income is one of the top reasons people fall behind on retirement savings. Unfortunately, the Covid-19 pandemic made loss of income a reality for millions of families this past year. Even families who didn’t experience job loss may have been furloughed, had their work hours reduced, or endured temporary pay cuts as companies took preventive measures to protect their bottom line.
When people have to stop saving for retirement due to income loss, it can be difficult for retirement accounts to recover, even when job security and earning levels return to normal. Not only are people losing out on months or years of savings during the pause, they’re also losing out on the earnings and exponential growth that results from compound interest.
And with an uncertain future, it can be difficult even for families who are back on track to contemplate funneling money into retirement accounts once again, knowing they won’t be able to access that money until they reach retirement age (or risk paying high penalties). This realization may have lasting effects on retirement savings rates for some time until people feel more secure about their immediate financial situations.
To prevent themselves from falling too far behind, some individuals are turning to side hustles to make up for lost income and continue saving for retirement during this period of economic recovery. Common side hustles include driving for ridesharing apps and delivery services or starting a small business, such as furniture flipping or selling homemade products online.
2. Spending Your Whole Paycheck (or Most of It)
Another common reason that people fall behind on retirement savings is due to spending their entire paycheck or living outside their means. More than half of Americans are living paycheck to paycheck in 2021 and are unable to allocate more of their income toward retirement accounts. Even high-earning families are spending more than they need to on nonessentials each month without realizing the sacrifices they’re making for the future.
Luckily, the pandemic has spurred more Americans to prioritize saving at higher rates than they had been before. If you want to save more of your paycheck toward retirement each month, I encourage you to start by tracking your spending. Tracking your spending gives you more clarity into where your money is going and thus more control over how much you spend on nonessentials each month.
Cutting back on unnecessary expenses doesn’t have to be painful. If this strategy is right for you, I encourage you to focus on reducing one discretionary expense at a time – something as simple as packing your lunch a couple of days a week instead of ordering out. You may be surprised at how much extra you can save when you start with small changes.
Additionally, as the economy recovers, many people are receiving raises from their companies to make up for the setbacks of the past year. Every time you receive a raise, plan to save at least a percentage of the raise toward your retirement account. The more you can save now, the more confident you’ll feel about your plan for the future.
3. Having Kids
Individuals and couples with children have an especially hard time saving for retirement during their child-rearing years. Raising a child until age 18 costs upwards of $230,000 on average, and this number doesn’t include college savings.
Many parents struggle to decide between saving for their children’s future college education or for their retirement. It’s understandable that you want to provide the best opportunities possible for your children to succeed on their own. On the other hand, college expenses can be paid for with student loans, while you can’t take out loans to fund your retirement.
Fortunately, some research suggests that many people are able to ramp up their savings significantly when their children leave the nest. Families with young children right now may want to develop a catch-up strategy that they plan to implement when their children leave home. To learn more about your options, see our previous blog post about catch-up strategies.
Are You Behind on Retirement Savings? Caviness Wealth Management Can Help You Make a Plan
Millions of people are worried about being behind on their retirement savings goals, and you may have legitimate reasons that are causing you to fall behind that are outside of your control. But whatever your reasons for falling behind, there are steps you can take now to get back on track with your retirement savings and increase the likelihood that you’ll be able to retire comfortably.
One of the most important steps you can take is to develop a plan. Developing a comprehensive financial plan provides insight into what your current savings rate may mean for your future if you continue on the same path. If that future doesn’t align with your goals, the financial plan can also outline the changes you need to make to achieve the vision you desire.
Another important step you can take is to review your investment allocations and ensure your money is invested appropriately for your stage of life. If you’re more than 10 years away from retirement, a higher percentage of your retirement savings can be invested in riskier options like stocks that have a greater potential of earning higher returns. If you’re close to retirement, you’ll want a higher percentage of your savings invested in more stable securities.
Of course, it’s impossible to make strategy and investment recommendations without knowing a great deal about your unique situation. Schedule a conversation with me today to see if I can help you develop the right strategies to get your retirement savings back on track.
