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Published: Dec 26, 2022 7 min read
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Can you imagine living on less than half your salary? That’s what just about half of retired Americans are doing, according to a survey by Goldman Sachs Asset Management (GSAM). The good news is, if you’re in your 20s, 30s, even 40s, you’ve got time to make adjustments so you can live more comfortably when you retire.

The first thing is to start saving for retirement now.

Will millennials even get Social Security?

Plenty of millennials are worried that Social Security, the federal government's insurance program that provides income to retirees, may not survive until they reach retirement.

It’s a simple math problem. Fewer people are paying into the system because of a drop in the birth rate, and more people are taking benefits now because of the baby boom. That will have a disastrous impact on future payouts.

In its annual report, the Social Security Administration said that after 2035 it expects to pay only 80% of the benefits currently scheduled for that period.

That means that a 35-year-old who earns $50,000 in 2022 will receive on average $17,370 less in Social Security income annually and $365,000 less over a lifetime," according to research house Healthview Services. For people making more than $150,000 a year, that's a $677,000 loss over a lifetime.

Not enough income to save

Millennials and members of Gen Z are far more likely than Gen Xers to say their main source of income is not enough to pay bills and save for the future. Many go into debt or receive financial support from relatives, according to Prudential Financial’s latest retirement survey.

Half of millennials say they regularly run out of money and need to use credit cards or turn to family for financial support, and 65% of millennials and Gen Z have received financial support in the past two years from either parents, significant others, relatives or grandparents, Prudential found. Inadequate salary paired with competing financial priorities is especially acute among black, Hispanic and female workers.

Unless millennials start planning for their long-term financial security, the outlook is bleak. GSAM reported that 35% of millennials said they're behind schedule on retirement savings.

How to get started

The No. 1 recommendation: define goals, develop a financial plan, then determine cash-flow needs to see how much you can put away, says Shurdonna Joseph, director of high-net-worth consulting at Janney Montgomery Scott.

The very first step is paying off any money you owe. Debt, including student debt, prevents just over half from accomplishing goals, such as owning a home and having kids, according to Prudential. Part of the problem is, 70% of millennials don't keep a formal budget and 38% don't invest.

“Without keeping an eye on finances, it can be easy for good spending and savings habits to slip," Brandon Goldstein, a financial planner with Prudential Financial, said in a release. A millennial himself, he agrees it can be tough to balance financial responsibility while maintaining a social life.

Saving early makes a difference

The most important asset millennials have is time for accounts to grow and compound.

They also have three savings vehicles baby boomers didn't have when the oldest among them started their work lives: the 401(k) plan, a Roth individual retirement account (IRA) and the Simplified Employee Pension IRA (SEP-IRA).

"We recommend investors save 12% to 15% of their income for retirement," said Maria Bruno, head of U.S. wealth planning research at Vanguard. If 12% is not possible, Bruno recommends saving as much as you can and increasing it every year.

The difference between putting away 6% of salary at 25 and increasing it annually by one percentage point until it hits 15%, and starting to save 15% at 40 is enormous. Starting early will result in the 25-year-old saving $1 million more, according to fund giant T. Rowe Price.

Take advantage of that 401(k)

The 401(k) plan is offered by for-profit companies. Employees contribute a percentage of each paycheck, pre-tax, into their account. A good idea is to turn up the auto increase function by 1% a year.

The money grows on a tax-deferred basis and the person pays taxes when they withdraw the money. People under 50 can contribute a maximum of $20,500 this year and $22,500 in 2023. Once you turn 50, you’re eligible to make catchup contributions of an additional $6,500 per year in 2022 and $7,500 in 2023.

Roth Individual Retirement Account

In a Roth IRA you contribute after-tax dollars and you pay no taxes when the money is withdrawn. A traditional IRA uses pre-tax dollars and you pay taxes when the money is withdrawn. The total annual contribution for both the Roth and traditional IRA is $6,000 this year, and $6,500 in 2023. People over age 50 can contribute an additional $1,000 per year (this will not increase in 2023).

Simplified Employee Pension Plan IRA (SEP-IRA)

What if you don't work for a company? The Simplified Employee Pension IRA (SEP-IRA) is available to self-employed entrepreneurs and small-business owners. SEP contributions are tax deductible. The individual pays taxes when the funds are withdrawn. A big advantage is the much higher maximum annual contribution: $61,000 in 2022 and $66,000 in 2023. SEP-IRAs do not have catchup contributions.

More From Money:

How to Save for Retirement — Even if You’re Still Paying Off Debt
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