Worried about retirement? You may be living better than you think

The idea of ​​retirement can bring up a variety of mixed emotions, from excitement and joy to fear and anxiety. Unfortunately, many of these negative emotions stem from worries about money and health. More than half of respondents to a recent Gallup poll believed they would face financial difficulties as they aged.

The good news is that there is a large gap between perception and reality. As we approach retirement, millions of us worry that we won’t have enough money. But research shows that once people actually stop working, most Americans find they can live comfortably.

Almost three out of four retirees say they are doing well

This discrepancy between perception and reality is nothing new. Gallup has been analyzing people’s retirement prospects for more than two decades, and it’s a consistent trend. Indeed, the data shows that many of today’s retirees who are doing well thought they wouldn’t have been so 20 years ago.

The latest Gallup data shows:

• Perception: 45% of non-retired Americans expect to have enough money when they retire.
• Reality: 74% of retired Americans say they have enough money to live comfortably.

What is behind this gap? Of course, it’s not that people’s brokerage accounts and 401(k) investments turned out better than they hoped. Only 29% of retired Americans view their investment accounts as their primary source of income. This is in stark contrast to the expectations of 50% of non-retirees.

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On the other hand, Social Security turned out to be much more valuable than people thought. While 58% of retired Americans say it is their main source of income, only 35% of non-retirees expect to rely on it when they retire. Finally, some retirees are downsizing, so their cost of living is lower than expected.

Three ways to ease your retirement fears

Many people don’t have a clear idea of ​​how much money they’ll need in their golden years. If you can shed some light on your retirement planning, it will be much less scary.

1. Calculate your retirement needs

People’s lives are so different that there is no single retirement goal that fits everyone. However, there are several ways to get a body shape that suits your lifestyle. For example, financial planners suggest that you will need about 80% of your current income in retirement. You can play around with this number depending on things like your current housing, travel and other expenses.

Let’s say you’re a couple with a combined income of $150,000. If we went with 80%, you would need $120,000 per year – $10,000 per month. The next step is to explore sources of retirement income. For example, you can go to the Social Security website to see how much you may qualify for.

Hypothetically, you could receive $3,000 from Social Security, $2,000 from rental income, and another $1,000 from a pension or annuity. In this scenario, you would need to earn $4,000 per month from your investments and savings.

Another financial rule of thumb comes into play called the 4% rule. Without going into too much detail, this means that your savings should be large enough to cover a 4% withdrawal in your first year of retirement, and then adjust for inflation each year thereafter. In this case, we need $48,000 ($4,000 per month), which would mean we have $1.2 million in our retirement funds.

2. Use tax-advantaged retirement accounts.

Tax benefits can really help you achieve your retirement goals. If your workplace has a 401(k), learn how it works. Many employers match contributions, which means lower taxes and extra money for retirement. If that’s not an option, look into an IRA. A Traditional IRA will reduce your tax bill now, while a Roth IRA can mean tax-free withdrawals when you’re older.

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3. Invest a percentage of your salary.

It’s never too late to develop an investing habit. If you have the time and can invest even a small portion of your salary, you will likely have a good chance of retiring. To give you an idea, the S&P 500 has historically generated an annual return of 8% since 1928. We can use this as a rough guide to stock market performance, but keep in mind that past returns are no guarantee of future returns.

If you invest $200 a week, after 30 years your portfolio could be worth almost $1.2 million. You’d set aside just over $310,000 and let compound interest work its magic on the rest. If you have less time, the math changes. You’ll likely have to invest more to reach your retirement goals.

Bottom line

There are a lot of doom and gloom headlines about retirement readiness, so it’s good to know that many of us are in better shape than we fear. Ultimately, knowledge and action are the best antidotes to anxiety. If you’re worried about your retirement, sit down and figure out what you’ll need. Then you can plan how to get there.