Retirement storage can be stressful, and it takes away money you can use to do things you like today. But in the long run it is worth it because this is the money that is going to put a roof over your head and pay your medical bills in retirement. However, despite the obvious importance of saving for retirement, more than one in five Americans have no pension savings at all, according to Northwestern Mutual.
What's even more disturbing are the ways some Americans are planning to do for their lack of savings. A recent Stash survey asked the Americans about various retirement strategies and found that some were beating the following five terrible approaches to carrying them through retirement.
1. Winning the Lottery
Surprisingly, 40% of Americans surveyed and 59% of the millennia said winning the lottery is a reasonable way to retire. But there are some major issues with this strategy. First, it is the pure odds of winning. You have a 1 in 292,201,388 chance of winning Powerball and the odds of winning Mega Millions are 1 in 302,575,350.
The average American spends $ 223.04 on the lottery each year, according to LendEDU. It's about a 99.999999997% chance that you will flush the money down the toilet. But if you invest it instead, the odds of increasing your money over time are much better. If you invested $ 223.04 each year for 40 years, your total contribution would amount to $ 8,923, but it would have grown to $ 44,535 with a 7% annual return.
It is also the fact that lottery winners are significantly more likely to go bankrupt within three to five years of beating the jackpot. If you do not know how to properly manage your money, there is a good chance that you will eventually spend all your winnings long before you retire.
2. Working a part-time retirement job
This is not a bad plan if you approach retirement age and your existing savings are not enough to make ends meet. However, is not a good reason to avoid saving for retirement while you are young. Nearly 40% of Americans end up retiring earlier than expected, according to the Boston College's Retirement Research Center. If you have to retire before you are financially ready, you can run out of money to cover your basic living costs.
There are several possible reasons why people are forced into early retirement. Your health can make it harder, so you can't work, or your spouse's health can suffer, and you may need to give them full-time care. You can lose your job and not find a new one. The bottom line is, you never know what is going to happen and you should not plan to work part-time late in your pension.
3. Finding cheaper living abroad
Again, this strategy can work, but be realistic about why you want to live abroad. Is it really to cut your cost of living or are you planning to travel all over the world? Do you want to stay there most of the time or do you want to make regular trips home to visit friends and family? Many trips can make your stay abroad much more expensive than being where you are. You also need to consider where you want to live abroad because many countries are not significantly cheaper than the United States
This plan may also be spared by unexpected events. If you get sick or a family member gets sick and you care about them, it may be preferable to be closer to home. Retirement abroad is not a viable option for anyone, and even if you plan it today, things can change then.
4. Depending on children
You raised your children and gave them all their lives. Perhaps, by the kindness of the heart, they will come back in favor of taking care of you in your old age, if you need financial support. But they should not pay the price for your lack of planning and diligence.
Your adult children are also trying to save their own financial goals, including retirement, home pay, or children's college education. By asking them to support you, you can damage their future financial security. Not to mention, when you live on someone else's dime, you have less to say in how the money is spent. Your kids can be generous enough to put a roof over your head if you have retired, but they may not be willing to take the bill for the trip around the world you are dreaming of.
5. Finding a Rich Spouse
If you are lucky enough to find a rich spouse, this may work, but there is no guarantee that it will happen. The odds may not be as bad as winning the lottery, but it depends on what you consider "rich". In addition, there is no promise that you will remain married during your life, and if you divorce, you are back where you started if not worse.
How to make a pension plan that actually works
You may be lucky, and one of the above plans may end up exercising, but you shouldn't trust it. Instead, you create a real pension plan based on your lifestyle and goals. Begin by estimating the life expectancy and deducting your estimated retirement age to find out a ballpark figure for the length of the pension. You may have to plan for a longer life than you think. One in three 65-year-olds who retire today will live over 90 years, and one in seven will live over 95 years, according to SSA.
Then sum up your estimated monthly living expenses for retirement and pass it by 12 to get your estimated annual expenses. Multiply this by the number of years of retirement, putting in an annual 3% in inflation. A retirement calculator can do this and will request your estimated annual return. Use 5% to 6% to be conservative, even though your investments may grow faster.
Finally, you withdraw the money you expect to receive from Social Security, a pension or an employer 401 (k) match. If you do not know how much you can expect from social security numbers, you will need to create a person number account that will tell you how much you can expect based on your current job, if you start with social insurance of various ages. The amount left after you deduct your earnings from other sources is the amount you need to save on your own. Your retirement calculator should give you an idea of how much you need to save per month to hit your goal. Try to save at least as much, but if you can't, just save as much as you can right now and try increasing your savings by 1% each year.
In theory, all of the above pensions are plans can work, but the probability is small. You are better off sticking to the tried and true method of creating a personal plan and saving as much as you can every month.