3 things to do immediately if you have no retirement savings

Retirement planning amid coronavirus crisis

Barron’s senior writer Reshma Kapadia and Barron’s Roundtable discuss how coronavirus upended some people’s retirement plans and what can be done to make up for that lost capital.

If you have even $1 saved for retirement, it might surprise you to know that you're doing better than a lot of other Americans. A recent Federal Reserve report found that nearly a quarter of working Americans don't have any retirement savings at all. This problem was worst among adults 18 to 29, with 42% saying they hadn't started saving, but perhaps more concerning is the 13% of Americans 60 and older who said they had no money to fall back on in retirement.

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If you're one of those Americans who has not begun saving yet, it's time to change that. It probably won't be easy, especially for those who have been hit hard by the coronavirus pandemic and recession, but there are still a few steps you can take now to set yourself up for retirement. Do these three things first.

1. Create a retirement plan

The first thing you must do is set your target retirement age and dollar amount so that you know how much you must save per month to reach your goal. You can choose any age that you'd like to retire at, but understand that you may have to revise your target if you find out your initial goal is not feasible. Subtract your chosen retirement age from your estimated life expectancy to get the approximate length of your retirement. Plan to live to at least 90 if you're reasonably healthy. It's always better to overestimate than underestimate when it comes to retirement savings.

Next, add up your estimated annual retirement costs and multiply them by the number of years of your retirement, adding 3% annually for inflation. Use a retirement calculator if you don't want to do this math yourself. When it asks about investment rate of return, enter 5% or 6%. Your money may grow more quickly than this, but you want to be conservative in case it doesn't. Once you've entered all this information, your calculator should tell you how much you need to save per month and overall to reach your goal.

Subtract from these totals any money you expect from Social Security benefits, a 401(k) match, or a pension. Your employer can provide details about any pensions and 401(k) matches you're eligible for, and you can estimate your Social Security benefit by creating a my Social Security account. Then, you should be able to figure out how much you must save on your own. For example, if you believe you'll need $2 million for retirement and that Social Security and your 401(k) match will cover $500,000, then you know you need to save $1.5 million on your own.

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Make adjustments from here until you find a plan that works for you. Delaying retirement is one option. This will give you more time to save while also decreasing the length, and therefore the cost, of your retirement. Seeking out ways to boost your income today is also a smart move because it can give you more money to put toward retirement. Asking for a raise might be out of the question in the current climate, but you could always start a side gig for some extra cash.

If you realize retirement probably isn't going to be an option for you because you got a late start on saving, consider working part time in retirement. You can find a job that better aligns with your interests and use this to supplement your personal savings.

2. Open a retirement account

Once you have a plan, you need a place to put your money. If your company offers a 401(k), this is a good place to start, especially if your employer matches some of your contributions. You can also open an IRA if your company doesn't offer a retirement plan or if you'd like to put away more money than your 401(k) plan allows for the year. You may contribute up to $19,500 to a 401(k) in 2020 or $26,000 if you're 50 or older, and you can contribute up to $6,000 to an IRA or $7,000 if you're 50 or older.

You might also have to choose between a tax-deferred and Roth retirement account. Contributions to tax-deferred retirement accounts reduce your taxable income this year, but then you owe taxes on your distributions in retirement. These accounts make the most sense for people who believe they're in a higher tax bracket today than they will be in once they retire. Roth retirement account contributions don't reduce your taxable income this year, but then they grow tax-free afterward. These accounts are a better choice if you think you're in the same or a lower tax bracket than you'll be in once you retire.

You can also choose to have some tax-deferred and some Roth retirement savings, but note that the contribution limits above are for all of your retirement savings, not for each type. So you can't contribute $6,000 to a traditional IRA and $6,000 to a Roth IRA this year.

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3. Start contributing 

Start setting aside money for your retirement as soon as possible. You may have to wait a little while if you don't have a steady income at the moment, but you shouldn't put it off any longer than you have to.

Your earlier contributions are more important than your later ones because they have more time to grow. Even if you can only spare $100 today, that $100 could grow into over $761 after 30 years with a 7% annual rate of return.

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Your 401(k) plan should enable you to automatically withhold money from each paycheck, and some IRAs may also enable you to set up automatic transfers so you don't have to remember to set aside money every month.

You might need to make some adjustments to your budget to free up the cash you need. Look for areas where you can cut back spending, like limiting how often you drive to reduce your gasoline bill or canceling subscriptions you aren't using. You can also try bringing in more cash by working overtime, if that's an option, or doing side jobs.

These steps are just the beginning. You must periodically check in to make sure that you're on track and make changes to your retirement plan as needed. Your financial situation will change with time, and so might your plans for your future and the rules surrounding your retirement accounts. Staying in touch with these changes is essential for keeping yourself on track.

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