Preparing for a successful retirement is no small feat. After all, as we’ve discussed, delayed gratification is not a strong suit for many human beings. With each passing year, American workers are tasked with funding more and more of their own retirement.
In just a few seconds, I can rattle off a host of questions that carry unimaginable amounts of importance. How much should I save for retirement? When should I retire? When should I claim Social Security? How long will I be retired for? What are my retirement investing options? These are all hundreds of thousands of dollars questions (if not millions).
With these important questions come one major problem, we humans do not act rationally and make behavioral mistakes when it comes to managing our own money.
For instance, how can I save to my 401(k) when I’m living paycheck to paycheck? Studies have shown that auto-enrollment in employer-sponsored retirement plans drastically improves participation numbers. Taking it one step further, auto-enrollment plus automatic increases of 1-2% in contribution rates per year may be all an individual needs to do when it comes to saving enough for retirement. Automatic enrollment in employer-sponsored retirement plans takes away the question of whether or not to save and reduces procrastination.
How should your investment dollars be invested? With retirement plans offering a host of investment options, it is easy to get overwhelmed. When we humans get overwhelmed, we put off making a decision. More and more retirement plans offer a target-date fund, which is an easy solution to the investment choice dilemma. Some will argue that there are better options to invest in, but ultimately, the best option is the one that is easy and you can stick to for the long haul.
At what age should retirees start claiming Social Security? Individuals are first eligible for claims at age 62 or as late as age 70. Each year that you delay claiming, your monthly benefit increases by 8% (plus inflation). Therefore, it’s probably wise to hold off starting Social Security as long as you can afford to. However, if you have health concerns, or simply need the income now, consider starting earlier.
Lastly, how long will we be retired for? Since none of us know when we will be passing away, it is important to be extremely conservative and just plan on living to age 100 or beyond. You do not want to be running out of money in your late 80s if you are perfectly healthy and could live another 10+ years. A possible solution to this problem is considering the option of turning some of your retirement savings into an immediate annuity. After all, this is exactly what Social Security is. You would simply be adding onto your reliable income stream with your own retirement savings in order to cover your basic living expenses. This will ensure you have at least enough income each month in retirement to pay your bills.
There’s a lot more to this topic than can be covered in a short blog post, but I hope you are starting to get the idea. It is important not only that we Americans take responsibility for our efforts, but it is also important that we are educated and helped along the way. We need systems to help us make informed, rational decisions. This way, we Americans can support each other and live a fruitful retirement when the time comes.