Are you feeling uneasy about your retirement planning? You’re not alone. Many Americans face a looming crisis as they approach retirement age, with inadequate savings and financial uncertainty becoming the norm.

The core issue is simple: a large portion of people aren't saving enough. According to the latest Federal Reserve data, only 57% of U.S. households currently hold retirement savings accounts, showing an increase but still highlighting a significant gap. A concerning 56% of Americans now admit they aren’t on track to meet their retirement savings goals, as reported by Schwab Retirement Plan Services in 2023.

The Reality of Retirement Savings

Even among those with retirement accounts, the median balance sits at just $100,000, according to the Federal Reserve’s 2022 Survey of Consumer Finances. For those aged 56 to 64, the median nest egg rises slightly to $164,000, per a Fidelity report. While these figures may seem promising at first glance, they fall short when considering that a typical retirement can last 20 years or more.

Is Social Security Enough?

The truth is, relying solely on Social Security will not be enough. As of 2023, the Social Security Administration reports that the average monthly benefit is $1,827, amounting to about $21,924 per year. Even if you and a spouse combine benefits, that totals roughly $43,848 annually, which may not be sufficient to cover rising healthcare costs and maintain a comfortable lifestyle throughout retirement.

The Pandemic’s Impact on Retirement Planning

The financial disruption caused by the COVID-19 pandemic has further complicated retirement planning. A study by Fidelity Investments in 2023 revealed that 44% of Americans feel the pandemic has significantly impacted their ability to save for retirement, leading many to believe it could take several years to recover. With many individuals facing job losses and early withdrawals from their retirement accounts, the path to recovery remains uncertain.

The Decline of Pension Plans

Adding to the challenge is the ongoing decline in traditional pension coverage. The Bureau of Labor Statistics reports that only 11% of private-sector workers are currently covered by a pension plan, a steep drop from the 35% coverage seen in the early 1990s. This trend means that most individuals must rely heavily on personal savings and investment accounts like 401(k)s and IRAs.

The Exception: IRA Millionaires

While many struggle, some have managed to accumulate substantial wealth for retirement. According to Fidelity, as of the end of 2020, 334,000 401(k) accounts and 288,000 IRA accounts held balances of $1 million or more. These individuals have achieved financial security through disciplined saving and strategic planning.

Estimating Income from a $1 Million Annuity

If you’re fortunate enough to save $1 million, you might wonder how much income that could generate. For a 60-year-old investing in an annuity, Schwab’s annuity calculator estimates a payout of around $4,318 per month for 20 years, amounting to over $51,800 annually. Add in Social Security benefits of around $37,000, and you could have a total income of approximately $88,000 per year. This would cover about 75% of a $118,000 pre-retirement income, meeting the threshold recommended by many financial advisors.

7 Key Steps to Achieve Your Retirement Goals

To join the ranks of those who can afford the retirement they desire, experts recommend taking these seven crucial steps:

1. Start saving as early as possible.

2. Save consistently and increase contributions over time.

3. Save enough to earn the maximum match from your 401(k) plan.

4. Diversify your savings across age-appropriate investments.

5. Avoid withdrawing from your retirement accounts prematurely.

6. Consider Roth IRAs for tax-advantaged growth.

7. Persist with your plan, even if you think it’s too late to make a difference.

Starting Early: The Power of Compounding

Time is your greatest ally when it comes to saving for retirement. By starting early, you allow compounding interest to do much of the work. For example, if you begin saving at age 25 with an annual income of $45,000 and contribute 10% of your salary, assuming an annual growth rate of 7%, you could amass over $1.2 million by age 68, according to a Bankrate.com retirement calculator.

If you delay by just 10 years, starting at age 35, your savings would shrink to approximately $608,000 by the time you reach retirement age. This example underscores the importance of getting an early start.

How Much Should You Save?

Experts suggest aiming to save 15% of your annual income. Judith Ward, a senior financial planner at T. Rowe Price, explains that this target becomes easier when you factor in company matches for your 401(k). Contributions to traditional retirement accounts, such as a 401(k) or IRA, also offer upfront tax deductions, enhancing your savings power.

For instance, if you contribute the maximum allowable $23,000 to a 401(k) and are in the 22% tax bracket, you could save $5,060 on federal taxes alone. If a full 15% contribution isn’t feasible, start smaller and increase your savings rate incrementally to meet the target.

Building Up a Retirement Nest Egg

To meet long-term retirement goals, the general rule is to have approximately 11 times your final salary saved by retirement. By gradually increasing your contribution rate each year, you can build a robust retirement fund. Even if you start later in life, increasing your contributions by a percentage or two annually can still get you close to your goal.

Avoid Loans and Early Withdrawals

Consistency is key to maximizing your retirement savings. Avoid the temptation to dip into your retirement accounts for loans or early withdrawals unless absolutely necessary. Early withdrawals disrupt the compounding growth of your investments and can significantly delay your progress. If you switch jobs, consider rolling over your 401(k) to your new employer’s plan to avoid penalties and maintain your investment growth.

Age-Appropriate Investing

Investing appropriately based on your age is another crucial factor. Younger investors can afford to take more risks, investing heavily in stocks and growth funds. As you approach retirement, however, transitioning a portion of your portfolio into bonds can help reduce volatility and secure your gains. For those with a moderate risk tolerance, starting to add bonds in their 50s and increasing the allocation as they age is a common strategy.

Maximizing Retirement Savings Tools

Taking advantage of employer-sponsored 401(k)s, especially when a company match is available, is essential. For added tax benefits, consider Roth IRAs, which allow tax-free withdrawals in retirement after age 59½ and five years of holding. This can be especially advantageous if you expect to be in a higher tax bracket later in life.

The Final Word: Don’t Give Up

It’s never too late to start saving for retirement. Even small contributions add up over time. Creating a budget and sticking to a savings plan can help ensure you meet your retirement goals. Aim to save enough to replace around 70% of your pre-retirement income, and factor in Social Security benefits as part of that income.

If you’re ready to make a change, remember that during the economic uncertainty of 2020, Americans managed to raise their household savings rate to 15%. This shows that even during challenging times, setting aside more money for the future is possible.

The Most Important Step: Prioritizing Your Savings Rate

“If you want to focus on one thing at a time, it should be your savings rate,” says Judith Ward. “If you’re only saving 5% of your pay, even the best investment strategy won’t help you reach your retirement goals. The savings rate is the key.”