Opinion: Saving enough money for retirement is a big job, but you don’t have to do it alone

Amid all this uncertainty, Congress still believes the best way to solve the retirement savings crisis in the United States is to revamp the Securing a Strong Retirement (SECURE) Act of 2020. The SECURE Act was designed originally to remedy an uncomfortable fact. While 68% of workers have access to a workplace pension plan, only 51% participate, according to the US Department of Labor.

The new update — known as “SECURE Act 2.0” — extends some of its signature benefits to those saving for retirement — or who want to — and those already tapping into their 401(k) and IRA nest egg or will soon.

SECURE Act 2.0 will require most employers to automatically enroll full-time employees in their pension plans and automatically increase their contributions each year. It will also allow more part-time workers to participate in their employer’s plans.

But if you’re already saving for your workplace retirement, these changes aren’t particularly revolutionary. So how will retirement savers benefit? If you are between the ages of 62 and 64, you can add up to $10,000 in annual “catch-up” contributions. Outside this age range, your catch-up reserve will cap at $6,500 in 2022.

The problem? Starting in 2023, all catch-up contributions to 401(k) plans will be treated as after-tax Roth contributions. This means that these contributions will not reduce your taxable income. The good news is that you will never have to pay taxes when you withdraw these Roth contributions.

The other “big advantage” of SECURE Act 2.0? Starting this year, you won’t need to start taking the required minimum distributions from your 401(k) plans and traditional IRAs until age 73. (The original SECURE law raised the age from 70 to 72). In 2029, this age increases to 74 years. In 2032, it becomes 75 years old.

As nice as these benefits are, they are not a panacea for solving America’s retirement crisis. The harsh reality is that neither the government nor your employer is responsible for ensuring that you will have enough money to retire. This is why you will have to take matters into your own hands.

It’s up to you to figure out how much money you’ll need to live on in your retirement, estimate where that money will come from, and how much you’ll need to withdraw from your retirement accounts each year.

And, if it looks like your retirement savings might run out sooner than you’d like, here’s what you might need to do about it:

1. Calculate your retirement expenses: According to a popular cliché, you will need 60% to 80% of your current income to meet your retirement expenses.

Don’t believe that. When you retire, you may want to buy a second home. Or travel a lot. Don’t forget health care expenses — a year of long-term care can cost $100,000 or more.

It is therefore better to overestimate than underestimate the amount of money you will need. There are many free and inexpensive tools that can help you. For example, Bloom can help you make better decisions about your retirement plans; You need a budget helps you prioritize daily expenses and better target your spending.

2. Estimate your sources of retirement income: Next, you need to determine whether all the income you receive during retirement will pay for the retirement expenses you want or will be insufficient.

Part of this amount will come from Social Security. How many? Find out by creating your own online account with the Social Security Administration (SSA). The SSA pulls data from tax returns to tell you how much you would receive each month if you retired before or after full retirement age (66 or 67 for most people).

If you don’t want to work in retirement, the rest of your retirement income will have to come from either a pension (if you’re one of the lucky few to have one) and your bank, 401(k), IRA and taxable investment accounts.

3. How much of your nest egg will you need to spend each year? Estimate how much money you will need to take out of your nest egg each year, both in dollar amounts and as a percentage of your savings. Assuming that the investments will increase the total value of your retirement assets by around 5% per year and that you will always withdraw the same amount each year, how long will it take for your savings to be fully depleted? If you’re under 20, you may have to make tough choices now or later.

4. The best solution: maximize contributions: It’s a fact: the amount of money you regularly contribute to an investment account will play a much bigger role in determining the size of that account than the size your money is invested in.

That’s why, if you still have a long way to go – a decade or more – before you retire, the best way to increase the chances that your retirement nest egg will last longer is to contribute as much as possible to your 401(k) or other retirement plan.

In 2022, you can contribute up to $20,500 in combined pre- or after-tax contributions to your 401(k). If you are over 50, you can make an additional $6,500 in catch-up contributions. If SECURE Act 2.0 passes in its current form, you will be able to contribute an additional $3,500 if you are between 62 and 64, although from 2023 all catch-up contributions will be classified as after-tax Roth contributions.

The more you contribute, the more you will benefit from company matching contributions. The more money you have in your account, the more you can take advantage of the tax-deferred growth potential of a diversified portfolio of stocks and bonds.

5. Stay invested in stocks for as long as possible: There is an old axiom that the amount of your portfolio invested in stocks should decrease as you approach retirement and that you should significantly reduce your exposure to stocks when you start withdrawing money from your savings accounts. retirement.

But given today’s inflationary environment, this may not be the best strategy. If rising prices mean you will need to withdraw more money than originally planned, you may need to increase your exposure to stocks. Why? Because, over the long term, stocks have produced better returns than bonds or cash. You’ll need this exposure to help your portfolio return outpace inflation. This may mean taking more risks than you are normally comfortable with.

6. Change your retirement expectations: Review and revise your retirement expectations. You may have to quit your full-time job later than expected. Perhaps you will need to work part-time during your retirement. Maybe you need to live more frugally. You may need to scale back your travel plans or delay major purchases.

Or perhaps you should delay withdrawals until you have to, at age 72 (age 73 or older, if Secure Act 2.0 is enacted) to keep your investments working for as long as possible.

You don’t have to make these decisions on your own

If you don’t have the time or inclination to do it yourself, consider working with a paid financial planner. These professionals can provide holistic advice to address all aspects of your financial life in retirement.

They can create scenarios showing what your living expenses and income might be if you retired at different ages. They can provide advice on social security and health insurance. They can recommend strategies to reduce the tax impact of RMDs and other withdrawals. They can analyze all of your savings and investment accounts and recommend adjustments that will help provide you with the income you need to live on today without jeopardizing the long-term viability of your retirement nest egg.

Since these paid advisors are only paid by you, you never have to worry about them trying to sell you investment or insurance products to earn commissions.

Ultimately, the best way to feel secure about your future is to do what it takes to make sure your retirement plan is on track, either on your own or with help. of a trusted advisor.

Pam Krueger is the founder and CEO of Wealthramp, an advisor matching platform that connects people with rigorously selected and qualified financial advisors. She is also the creator and co-host of MoneyTrack on PBS and the Friends Talk Money podcast for PBS Next Avenue.

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