Americans are living longer than ever. A woman who lives to age 65 can expect to live until she's nearly 87, while a man can expect to live to 84, according to the Social Security Administration. That's good news from a health perspective, but living longer could pose challenges from a retirement perspective — especially if you haven't saved enough.
It's important to figure out how to save for retirement and maintain your standard of living without depleting your savings — no matter how much you have put aside for the future. From maximizing your savings to not outliving your money, here's how you could enjoy a comfortable retirement.
Examine Your Target Number
How much do you need to save for retirement? As a starting point, consider using an online savings calculator to help you figure out a baseline, or think about speaking to a financial advisor to get a more detailed financial analysis.
For example, if we assume a 7 percent rate of return — the average for the stock market over the last 100-plus years, according to The Wall Street Journal — you'd have over $745,000 in retirement savings if you contributed $300 a month for 40 years. Increase that amount to $500 a month and you'd have over $1.2 million. This could help show the power of saving for retirement as early as possible.
You also may need to assess your cost of living. Your expenses in retirement might seem to be much less than during your working years. However, you may be replacing expenses like paying for your children to go to college with a new mortgage in a retirement community, buying a new car every 10 years or choosing to travel more.
You also may pay less in income taxes, since your yearly retirement income may be substantially less than your working income. But at the same time, your health care spending may increase as you age. Take all of these things into consideration to help come up with an "annual retirement income" on which you could maintain your standard of living.
Maximize Your Savings
If your employer offers a match for your retirement contributions, consider contributing the max you can afford! Many employers offer a dollar-for-dollar match if you contribute up to a certain percentage of your pretax income.
Another way that could help to increase retirement savings is to increase your income. This could mean finding a higher-paying job, working more hours or taking on part-time or freelance work. Cutting back on spending could increase your savings too. Look at how you spend discretionary income. Could you spend less on restaurants, shop less or drive a less expensive car? If the answer is yes to any of these, you might have a straightforward solution to saving more.
Catch-Up Contributions & Social Security
The maximum you can contribute to retirement accounts like a 401(k) or 403(b) (for nonprofits) is $18,000. However, if you're 50 or over, the Internal Revenue Service lets you make an additional $6,000 in catch-up contributions. If you have an individual retirement account (IRA), the 2017 catch-up contribution limit for these accounts is between $1,000 and $3,000, depending on your IRA account.
If you have a 401(k) and you're 50, you could contribute the annual maximum of $24,000 — if your budget allows. Doing this could boost your retirement savings by $360,000 by age 65 (and that doesn't even factor in the interest you'd earn on these contributions).
You could also consider delaying when you collect Social Security. If you delay retirement until age 70, you could earn a 132 percent higher monthly benefit than if you started collecting at age 66.
Watch Out for Lifestyle Inflation
When we earn more, we tend to spend more. But if you do this in retirement, the consequences could be dire. Retirement typically comes with a fixed income, so look at your lifestyle habits and current expenses and determine how you could adjust them to fit retirement.
Do you need to downsize your home to lower your mortgage or your monthly utilities and property taxes? Could you move to a more affordable location? Do you spend a lot on dining, vacations and other discretionary items? Looking for ways to cut back now can help avoid larger lifestyle adjustments when you retire.
Health care is one of the biggest expenses for retirees. To help offset this cost, consider opening a health savings account (HSA), a savings vehicle that's combined with a high-deductible insurance plan. You can contribute money tax-free into this account to pay for medical expenses. HSA contributions are tax-deductible, and the money in these accounts continues to earn interest even if you never use it to pay for health care. Only qualified medical expenses can be withdrawn tax-free, but even so, an HSA could be another good way to plan for your future.
Also consider long-term care insurance, which can help cover the cost of home care, a nursing home, hospice care and other kinds of care that may be necessary as you age — or face a serious illness. Looking for a policy now could be helpful because premiums tend to increase with age.
Your retirement may need to last for two decades or more and you could help prepare for it by saving early, adjusting your lifestyle, maximizing catch-up contributions and by considering more conservative investments as you age to help protect your retirement savings. A combination of preparation and strategy can help ensure you don't outlive your retirement savings — and that you can enjoy all you've worked for.