As per a recent survey of the Employee Benefits Research Institute (EBRI), American workers’ confidence in their retirement plans is increasing. Two-thirds of employees said that they are confident that they are doing a great job balancing their finances for retirement, and a quarter of them said they were very confident. The survey also showed a considerable number of respondents who said that they have started taking critical steps to prepare for retirement compared to their last year’s preparation.
Despite America’s positive development, there’s more room for improvement. In this article, we have learned some steps employees can take to improve your retirement readiness during the crises.
Estimating retirement expenses
44% of employees surveyed said they figured how much money they would need in retirement (monthly) Last year, only 39% were calculating their monthly retirement expenses. This may look positive, but 56% of people are still not doing this, which could be dangerous. Without a monthly plan of your retirement expenses, it’s easy to save less and run out of your savings early.
Estimating retirement expenses may not be an easy task because you are never sure of your monthly spending. But you can always consider your present-day spending as a baseline and plan your retirement spending accordingly. Don’t wait to save for retirement, and this time, you probably aren’t paying for childcare so that you can keep those costs out of your new budget. You might spend more on things like vacations if you plan to travel somewhere or need more money to live your dreams after retirement.
Once you estimate your monthly spending, you can calculate yearly spending by multiplying it by 12 to get a rough estimate of your annual expenses, then increase that with the number of years of your retirement, (don’t forget to add 3% annually for inflation) and try to calculate the money you would need in total. You can use a retirement calculator to estimate how much your investments could increase from now to your retirement time. Then remove the money you expect to get from other sources, like Social Security, a pension, or an employer 401(k) match and find how much money you can save on your own. Make some adjustments to create a plan that works best for you.
Plan for any significant emergency
There are unwanted guests like surprise expenses that may affect your life at every stage, and if you’re retired, these surprises impact your financial stability more. According to the EBRI survey, only 38% of employees are preparing for emergencies and significant expenses in retirement (Only 31% fell under this category, the last year). The percentage has increased from the previous year, but many more people are at risk when it comes to financial security.
All employees should invest in an emergency fund to fight unplanned expenses and carry this into retirement to live their post-retirement life without any hassle. Retirees need to invest in an even more substantial emergency fund than current workers due to the lack of income sources to deal with emergency funds after retirement and used their savings. Everyone should save at least three months’ worth of living expenses for an emergency fund and keep six months’ worth or more from being on the safer side.
Workers should try to get insurance coverage for their home, vehicles, and family so that they aren’t stuck paying these bills during an emergency. A backup plan helps you understand how you will handle the situation if you aren’t able to bear a significant expense. You may have to reduce your monthly spending or forget to do recreational activities like travel to cover up your necessities.
Healthcare Insurance in retirement is Important.
According to the survey, 36% of employees said they have already calculated the money they would need for their healthcare in retirement (Last year, only 29% did this preparation). The percentage has increased, but more people overlook healthcare costs because these costs are unpredictable, apart from your monthly insurance premiums. As we know, our future health is uncertain, so developing a healthcare plan is essential.
As I said earlier, taking adequate insurance asks you to reduce your out-of-pocket costs. Medicare covers some of your retirement healthcare costs, but it does have its premiums, copays, and deductibles, and it doesn’t cover 100%. You might need a supplemental health insurance policy to include things that Medicare doesn’t support.
Make your health savings account (HSA) a priority and start saving for your retirement medical expenses if you’re eligible. The money you would put in this account will reduce your taxable income for the year, and if you use that money for medical expenses, it won’t be taxable. In case you use these HSA funds for non-medical expenses, you will be asked to pay taxes on them, plus a 20% early withdrawal penalty if your age is under 65.
A high-deductible health insurance plan is a must, and every employee should contribute to an HSA — one with a deductible of $1,400 or more for a worker in 2020 or $2,800 or more for a family. An employee can contribute up to $3,550 in 2020, and families up to $7,100. Adults 55 and older can add another $1,000. You can contribute up to the annual limit every year provided you have a qualifying insurance plan, but when you enroll in Medicare, you will be removed from an HSA. You can use your existing HSA funds, but not continue contributing to it.
We know that planning these three things isn’t an easy task because so many variables are involved, but we still advise everyone to decide how much you must save for retirement. After estimation, If you’re worried that you don’t have much, you can always reduce your spending and improve your savings to control the depleting situation.
