by Stephen Reed | Accounting News, News, Newsletter, Retirement, Retirement Savings
With high inflation, high gas prices, and high mortgage rates, it’s no wonder Americans feel like saving for the future is currently an uphill battle. Financial anxiety is up, and many Americans are cutting back on their 401(k) contributions. But for millions of American workers, the problem is even graver: they don’t have access to a workplace retirement plan at all.
President Trump says he has a plan to address this problem.
During his February State of the Union address, Trump introduced a new retirement savings proposal for workers who’ve been left out of the traditional retirement system. And on April 30, he signed an executive order directing the Treasury Department to launch a new website next year called TrumpIRA.gov. The goal is to give workers without employer-sponsored retirement plans easier access to low-cost retirement accounts.
A Substantial Retirement Gap
Approximately 56 million Americans currently do not have access to a workplace retirement plan. And for many, opening an IRA on their own can feel confusing, expensive, or easy to put on the back burner. Add in the fact that some investment platforms require minimum balances, and smaller savers can easily get discouraged.
This new proposal from Trump seeks to remove some of those barriers.
According to the executive order, the IRA providers listed on TrumpIRA.gov must keep costs low. The annual expense ratio, including management fees, operating costs, and administrative expenses, cannot exceed 0.15% of an account balance. The provers also cannot require minimum contributions or minimum account balances. This is a win for lower-income workers starting with small balances.
Similarities to the Federal Thrift Savings Plan
In Trump’s State of the Union address in February, he said workers who don’t have a workplace retirement plan would be able to “access the same type of retirement plan offered to every federal worker.”
He was referring to the Thrift Savings Plan, which is the retirement system used by federal workers. It’s viewed as one of the lowest-cost retirement savings programs available. The intention of Trump’s proposal is to offer similar investment access to private-sector workers who lack workplace retirement benefits.
Starting next year, eligible workers would be able to visit TrumpIRA.gov, open an IRA account, and begin investing.
Enter the Federal Savers Match
One of the biggest benefits integrated into the proposal is the upcoming Federal Savers Match program. This is a provision in Secure 2.0, the Biden-era legislation that was signed into law in 2022.
Starting in January 2027, the provision will offer a match for workers earning less than $35,500 per year (or for married couples earning less than $71,000).
Eligible workers who save up to $2,000 per year could receive a federal match of up to $1,000. Married couples saving up to $4,000 could receive a match of up to $2,000.
For workers who live paycheck to paycheck, even small matching contributions can add up and make a difference over time.
Why Retirement Savings Are Crucial Right Now
According to a recent study by Northwestern Mutual, Americans now believe they need $1.46 million to retire comfortably, which is roughly $200,000 more than last year’s estimate. This study also found that 46% of Americans do not expect to be financially prepared for retirement. And 48% believe there is a real chance they could outlive their savings.
At the same time, thanks to inflation and rising living costs, some Americans are lowering their 401(k) contributions.
This is why expanding access to retirement funds is so important right now. A simple, lower-cost way to save could help millions of American workers build long-term financial security.
by Daniel Kittell | Accounting News, News, Retirement, Retirement Savings
The definition of a retirement gap is when the income you are on track to have when you retire—from sources like Social Security, pensions, part-time work, or a 401(k)—falls short of the income you will actually need to retire the way you want. While you may be working with a well-planned budget in your golden years, rising costs and unexpected expenses could cause a discrepancy between your retirement income and your actual needs. Thus, when drawing up your retirement plan, you need to be prepared for the possibility of income gaps.
Longevity and Lifespan
The good news: overall we’re living longer and healthier lives. The bad news: as lifespans increase and the economy experiences unforeseen shifts, the amount of money needed in retirement may be more than you planned for. This isn’t bad news, exactly, but it does create the need for more foresight and flexibility when it comes to long-game financial planning. A greater duration of longevity likely means a longer retirement, and that creates the potential for a greater money deficit.
Total Income Gap
Your total income gap is the difference between your retirement income target—which encompasses necessary living costs as well as extras, like travel expenses and other bucket list items—and the total guaranteed lifetime earnings you’ve acquired over the course of your employment, such as Social Security, pension benefits, and any deferred compensation. For example, someone who wants $160,000 per year in retirement to maintain their lifestyle but receives $60,000 per year from guaranteed lifetime earnings, would have a $100,000 total income gap.
How to Determine Your Retirement Gap
You could use a retirement income calculator, but online tools cannot take into account your personal lifestyle plans. A better option might be to add up all your potential retirement income sources, like 401(k), Social Security, Individual Retirement Account (IRA), pension, and other savings investments. Next, calculate a plausible estimate of the funds you will need for your retirement. This can be calculated as either a monthly or lump sum. Finally, subtract your essential funds from the amount you are estimated to have. Any discrepancy is your retirement gap. If you find this process overwhelming, meeting with a financial advisor could provide you with a clearer picture of your retirement finances.
How to Bridge the Retirement Gap
Once you have a better picture of your retirement savings, there are steps you can take now to bridge the gap, grow your savings, and secure financial sustainability throughout retirement. Perhaps the most obvious way is to start ramping up your saving effort. Start here:
- Examine and rework your budget.
- Tighten spending on extras like restaurant and take-out meals, vacations, and any superfluous extras.
- Transfer high-interest credit card balances to a card with a more competitive rate to pay down balances faster.
- If it’s feasible (say, with the money you are saving by cutting back on extra spending), think about maxing out catch-up contributions to your 401(k), supplemental retirement plan, or IRA.
If you are counting on Social Security benefits as a significant portion of retirement income, you may want to wait to retire until your full retirement age as benefits increase each year you delay retirement.
Another option for bridging the gap is to adjust your outlook of retirement and adopt a semi-retirement strategy where you continue to work part-time or on a project basis. You might find that your career easily segues into freelance, consulting, or independent contract work, so you can continue to earn income while spending more time with family and pursuing hobbies. Or perhaps a hobby has the potential to grow into a side or part-time gig.
Finally, reevaluate your investment game plan. In lieu of shifting all your funds to more conservative investment options as you age, work with a financial professional to assist in procuring a combination of investments that have the potential to grow your retirement funds in a shorter period.
Implementing several small steps such as the ones above will help you cover a retirement savings shortfall.
