Americans' retirement plans are improving, but here's how to make yours even better

Statistics on the average American's retirement plan are usually pretty dire. Many people struggle to save as much as they'd like to, and an alarming number of people haven't begun saving for retirement at all. But the news isn't all bad.

American workers' confidence in their retirement plans is rising, according to a recent Employee Benefit Research Institute (EBRI) survey, with two thirds saying they are at least somewhat confident that they are doing a good job preparing financially for retirement, and a quarter saying they are very confident. The survey also reported an uptick in the number of respondents who said they've taken some key steps to prepare for retirement, compared to 2019.

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Despite these positive signs, there's still a lot of room for improvement. Here are a few steps you can take to improve your retirement readiness right now.

Estimate how much money you'll spend in retirement

About 44% of those surveyed said they estimated how much they would need each month in retirement, up from 39% in 2019. But that still means 56% of people aren't doing this, which could prove dangerous. Without a plan for how much you'll spend in retirement, it's easy to save too little and run out of savings prematurely.

Estimating retirement expenses isn't easy because you don't always know how your spending will change between now and retirement. But you can use your current spending as a baseline and adjust up or down as necessary. You won't need to save for retirement in retirement, and you probably won't have to pay for child care anymore, so you can leave those costs out of your new budget. But you might spend more on other things, like transportation, if you plan to travel often. Or you may need to budget more money for the hobbies you plan to enjoy in retirement.

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Once you have a rough monthly estimate, you can multiply this by 12 to get a rough annual estimate, and then multiply that by the estimated number of years of your retirement, adding 3% annually for inflation, to figure out how much you need to save in total. Use a retirement calculator to estimate how much your investments could grow to between now and retirement. Subtract money you expect from other sources, like Social Security, a pension, or an employer 401(k) match, to determine how much you must save on your own. Then, make adjustments as necessary until you have a plan that works for you.

Know how you'll cover a large emergency

Surprise expenses can affect you at every stage of your life, and if they happen in retirement, they can derail your entire plan. Yet only 38% of workers EBRI surveyed reported preparing for emergencies and large expenses in retirement. This is still an improvement over the 2019 survey results, when just 31% said the same, but it means a lot of people are taking a big risk when it comes to their financial security.

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Workers should have an emergency fund to help them cover unplanned expenses, and they should carry this into retirement to help them cover surprise bills so they don't have to dip into the money they've set aside for their routine living expenses. Retirees may want to have an even larger emergency fund than workers since they don't have a job to provide income to replenish their emergency fund after they've used it. You should definitely save at least three months' worth of living expenses for emergencies, but feel free to save six months' worth or more if you want to feel extra secure.

You should also make sure you have adequate insurance coverage for your home, vehicles, and family so you aren't stuck paying for large bills out of your own pocket. Consider making a backup plan for how you'll handle it if you find you're unable to cover a large expense. You might have to cut back monthly spending or forego some recreational activities, such as travel, so you have enough to cover your essential bills.

Plan for healthcare in retirement

Only 36% of workers surveyed said they'd calculated how much money they'd need for healthcare costs in retirement, up from 29% in 2019. It's easy to overlook healthcare costs because they're sporadic and unpredictable, apart from your monthly insurance premiums. And with your future health uncertain, it's hard to know what to plan for.

As I mentioned above, making sure you have adequate insurance is crucial for reducing your out-of-pocket costs. Medicare will cover some of your retirement healthcare costs, but it has its own premiums, copays, and deductibles, and it doesn't cover everything. You might want to purchase a supplemental health insurance policy as well to cover the things Medicare doesn't.

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You should also save for your retirement medical expenses in a health savings account (HSA) if you're eligible for one. Money you put in these accounts reduces your taxable income this year, and if you use it for medical expenses at any age, you won't pay taxes on it at all. You can also use your HSA funds for non-medical expenses, but then you'll pay taxes on them, plus a 20% early withdrawal penalty if you're under 65.

You must have a high-deductible health insurance plan to contribute to an HSA -- one with a deductible of $1,400 or more for an individual in 2020 or $2,800 or more for a family. Individuals may contribute up to $3,550 in 2020, and families may contribute up to $7,100. Adults 55 and older may add another $1,000 to these limits. You're free to contribute up to the annual limit every year you have a qualifying insurance plan, but once you enroll in Medicare, you can no longer contribute to an HSA. You may still use your existing HSA funds, though.

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Planning for the above three things isn't easy because there are so many variables involved, but you should at least attempt it so you have some idea of how much you must save for retirement. If you're worried about not having enough, you can always save a little more or delay your retirement, until you feel confident that the savings are sufficient.

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