Traditional advice on retirement planning is losing its place in today’s world. Save 15% of your income, contribute to a 401(k), have a pension, and don’t forget about Social Security? That's just not reality for many workers these days.
A recent study from the Government Accountability Office showed that only 20% of working Americans 55 years or older have access to a pension plan. Even more sobering? Just under half of this group on the cusp of retirement have no savings set aside for when they stop working.
Pensions have been disappearing for decades now, but the rise of the gig economy has accelerated changes to the number of workers with access to a 401(k). In 2014, 53 million Americans freelanced. By 2017, that number was 57.3 million, according to a study done by The Freelancer’s Union and Upwork. Freelancers don’t have access to company benefits, including retirement plans.
Even those fortunate enough to have a 401(k) may struggle to fund their account because there just isn’t the money in their budget. Wages have stagnated across industries in the U.S. in the past 40 years. The 2018 hourly wage had just as much purchasing power as it did in 1978, despite cost of living increases and slashes to retirement funds, according to a Pew Research study.
With the rules of retirement changing, we need new strategies. Here are three to help you thrive, no matter what your situation:
Invest while paying off debt
You can't afford to wait to pay off your debt before you start investing. Some 12% of Baby Boomers carry student loan debt, compared with 48% for Millennials and 34% for Gen Y, according to a report by the AARP and AYA.
Boomers also carry on average between $6,465 and $8,158 in credit card debt. Gen X has between $8,235 and $9,096 in credit card debt. Waiting to invest until you’re debt free could mean losing decades of investment returns.
If you graduated at 22 and don’t start investing until 34, you can see on the chart below that you would lose out on $4,358.26 in market gains.
Even if it's just $50 a month to start, get those investments going ASAP. You can use a calculator like this one to see just how much your money can grow over time.
Fifty dollars a month is small enough that you probably won’t miss it from your budget, yet big enough to generate more money for you even as you focus on debt pay off.
While not everyone has access to a 401(k), anyone 18 and older can open a traditional or Roth IRA for themselves. (The difference between these two flavors is that Roth contributions are taxed on the way in, while traditional contributions are taxed on the way out.) The annual maximum IRA contribution is $6,000 for 2019, with an additional $1,000 in "catch-up contributions" allowed for those age 50 and over.
You can open an IRA on your own with most brokerages simply by filling out paperwork online that includes your Social Security number, linking a bank account, and including information on things like your age and income. Some brokerages have minimum deposit requirements; for example, Vanguard requires at least $1,000 to open an IRA. Other brokerages, like Fidelity, have no minimum requirements for an IRA, but certain investment funds within the brokerage may have a required minimum investment.
One reassuring aspect of Roth IRAs is that, even though they are retirement accounts, you can withdraw your contributions any time, penalty free, because you’ve already paid taxes on them. (You may face penalties if you want to withdraw any earnings your contribution made in the market before you turn age 59 1/2 and before the account is five years old.) So if you were skittish about your money being "locked up" for retirement, a Roth IRA is actually more accessible than you may have thought.
“Also, remember that the Roth IRA is really just a vessel,” says Diana Freeburg, a certified financial planner in San Francisco, CA. “You can fill it with really conservative bond funds, a bunch of hot tech stocks, or anything in between,” Freeburg says.
Diversify your retirement income
It's crucial for a safe retirement to have multiple streams of income -- think dividend-producing stocks, rental income from renting out a room in your house or owning investment real estate properties. State governments offer many first-time home buyer programs to help people without much savings fund a real estate purchase, and you can use "house-hacking"-- renting out a room or empty space in your home, to turn your house into a cash-generating asset.
If you do a search for ‘first-time homebuyer assistance program + your state,’ you should find the options available. The rules for them vary state to state, but generally they are for primary residences for first-time home buyers only.
Having multiple streams of income during your working years can help you pay off debt faster, which means you’ll have more to save. It can also create financial security: if you lose your main source of income but have a second source, you won’t have to rely as heavily on your savings until you find a new job.
Reinvest your windfalls
From tax refunds to work bonuses to inheritances, reinvesting those lump sums can do wonders for your retirement plan. Most of us find it difficult to save regularly, but if you take that $2,000 bonus and put it in an IRA, you're already a third of they way to maxing it out that year. Plus, now it has years to compound and earn you more money.