10 Big Retirement Obstacles You Can Overcome

If you’ve ever embarked on a big undertaking, whether it’s running a marathon or cleaning out your garage, you have probably encountered impediments that delayed or derailed your progress. Some — a knee injury, for example — are significant. Others are more accurately characterized as excuses; you’re not sure what to do with those old cans of paint, so you decide to watch Netflix instead.

Similarly, you’ll likely face barriers and detours on the road to a comfortable retirement. According to a recent Charles Schwab survey of 401(k) participants, 99% of Generation Z workers say they face obstacles in saving for retirement (up nine percentage points from a year earlier), followed by 88% of millennials and 91% of Gen Xers. But whether you are just starting your career or approaching the end of your working years, there are strategies you can adopt to navigate your way to a secure retirement.

Obstacle #1: No room in the budget to save

When you’re starting out in the workforce, making your paycheck last until the end of the month can be overwhelming, especially given that the cost of living is much higher than it was a couple of years ago. Although it’s tempting to postpone saving for retirement until you’re more financially secure, at this stage in your life, even a modest contribution to a 401(k) or other retirement savings plan will add up significantly over time. It’s also important to build saving into your budget, says Jim Crider, a certified financial planner in New Braunfels, Texas.

And though it’s simplistic to suggest that millennials and Gen Zers can solve their money problems by giving up expensive coffee drinks and avocado toast, such expenses can add to “lifestyle creep,” Crider says. “It’s not about the latte; it’s about the habits you’re building.”

Start by conducting an audit of all your expenses over the past three months, says Brittany Wolff, a CFP in Greenville, S.C. You can download a budget app to track your spending or create your own spreadsheet. Use your bank account and credit card statements to track spending; many financial institutions provide a breakdown of expenses by category. Once you’ve completed this exercise, you may be able to identify things you can live without, Wolff says. “I’m not asking you to remove something you value and enjoy, but almost everyone I go through an audit with sees something they didn’t realize they were spending money on.”

401(k) contribution limits

In 2024, workers younger than 50 can stash up to $23,000 in a 401(k) or other employer-sponsored plan. Most young workers can’t afford to save anywhere near that much, but there’s a good chance your employer will give your savings some rocket fuel. More than 85% of 401(k) plans managed by Fidelity Investments, the nation’s largest 401(k) provider, match employee contributions. Formulas vary, but in one common structure, the employer matches $1 for every $1 you contribute up to 3% of your salary, followed by 50 cents for every dollar you contribute up to the next 2% of your salary.

Even a small contribution, plus a match, will grow and compound over time. The balance will grow even faster if you increase contributions. Many employers allow you to automatically ratchet up contributions to your 401(k) by 1% to 3% of salary a year. “As counterintuitive as it sounds, when you’re young and broke is actually the perfect time to start investing,” says Madison Sharick, a CFP in Pittsburgh.

Pay attention to vesting, too. Depending on your employer’s policies, you may lose matching funds if you leave your job before a specified period has passed. For example, you may not be entitled to 100% of matching funds unless you remain on the job for at least three years. It’s not unusual for young workers to change jobs frequently, but it’s worth considering what you might be giving up if you accept an offer from a different employer.

What type of 401(k)? 

In addition to offering a traditional 401(k), most large employers give workers the option of investing some or all of their contributions in a Roth 401(k). Money invested in a Roth 401(k) is after-tax, so your contributions won’t reduce your taxable income. But when you’re just starting out and earning a modest income, the tax break you get from a traditional 401(k) may not add up to much. And your future self will thank you for your Roth 401(k) investments because once you turn 59-½, withdrawals will be tax-free. Plus, starting in 2024, you won’t be required to take minimum distributions after you retire. You can contribute to both a traditional and a Roth 401(k), as long as your total contributions don’t exceed the annual threshold.

Obstacle #2: Your employer doesn’t offer a 401(k) (or you work for yourself)

If your employer offers a 401(k) or similar plan, saving for retirement is almost a no-brainer. In fact, about two-thirds of large employers automatically enroll new employees in their plans. Workers who don’t want to participate are required to opt out.

But if you’re self-employed or work for a company that doesn’t offer a retirement plan, you will need to put in some extra effort to save for retirement. On the plus side, you have several tax-advantaged options from which to choose.

Traditional IRA

If you work for an employer that doesn’t offer a retirement plan, you can take a deduction on your tax return for contributions to a traditional IRA, no matter how much money you make. In 2024, you can deduct up to $7,000, plus $1,000 in catch-up contributions if you’re 50 or older. If your spouse is covered by a workplace plan but you are not, you can deduct the maximum contribution if your modified adjusted gross income is less than $230,000. If your MAGI is between $230,000 and $240,000, you can claim a partial deduction (more on the spousal deduction below).

Roth IRA

Another option is a Roth IRA. In 2024, you can contribute up to $7,000 ($8,000 if you’re 50 or older) to a Roth as long as your modified adjusted gross income is $146,000 or less, or $230,000 or less for married couples who file jointly. (Note that the $7,000 or $8,000 maximum contribution is the total combined amount you can allocate among both traditional and Roth IRAs.) You won’t get the up-front tax break, but withdrawals will be tax-free when you retire, and you won’t have to take required minimum distributions. You can withdraw contributions at any time without paying taxes or penalties (early withdrawals of investment earnings may be subject to a penalty and tax).

Solo 401(k)

A Solo 401(k) is worth considering if you’re self-employed or your business’s only other employee is your spouse.

The contribution structure has two parts: As an employee, you can make elective deferrals of up to $23,000 in 2024, with catch-up contributions of up to $7,500 if you’re 50 or older. And as an employer, you can contribute up to 20% of your net self-employment income, for a combined total of up to $76,500. Contributions to a traditional solo 401(k) are tax-deferred; some providers offer a Roth option.

SEP IRA 

In 2024, self-employed workers can contribute the lesser of 20% of net income or $69,000 to a SEP IRA. SEP IRAs generally have fewer administrative requirements than solo 401(k) plans, and if you expect to hire employees (other than your spouse), a SEP IRA is probably the better choice. Keep in mind, though, that you’ll be required to contribute an equal percentage of salary for all eligible employees.

In the past, you could make only pretax contributions to a SEP IRA, but legislation enacted in late 2022 allows SEP IRA providers to offer a Roth option. However, although the provision became effective in 2023, it may be a while before providers make the administrative changes necessary to offer a Roth SEP IRA.

OBSTACLE #3: Student loan payments

In October 2023, a three-year pause on federal student loan payments ended, forcing millions of Americans to resume payments on a total of more than $1.6 trillion in debt. The average payment is $203 a month, according to an analysis by credit bureau Experian — a significant expense if you’re already struggling to pay the bills.

Although student loan payments may feel burdensome, the worst thing you can do is ignore them. Student loans are nearly impossible to discharge in bankruptcy, and if you default on your loans, your credit score will be tarnished. Plus, the government may garnish your tax refund and other federal benefits (including Social Security, if you’re still in default when you retire).

Ways to cut down student loan debt

There are, however, steps you can take to make your payments more manageable and free up funds to contribute to your retirement plan. Start by checking whether your employer offers repayment benefits. Employers have long been able to provide employees tuition assistance as a tax-free benefit, but pandemic-related legislation enacted in 2020 temporarily expanded that benefit to include principal and interest on qualified student loans. The expanded benefit is scheduled to expire at the end of 2025, and the maximum amount eligible for tax-free treatment is $5,250 a year.

Another option is to switch from the standard 10-year repayment plan to an income-driven repayment (IDR) plan, which bases monthly payments on your income. With an IDR plan, you can adjust your monthly payment to as little as zero if your income is low enough, and you may be eligible for loan forgiveness after 20 to 25 years of payments. However, you may also end up paying more in interest in the long run.

Contributing to a 401(k) or other retirement plan could help you qualify for a lower payment with an IDR plan. Monthly IDR payments are calculated based on family size and your adjusted gross income, and contributions to a tax-deferred plan will reduce your AGI. The U.S. Department of Education offers a loan simulator you can use to estimate monthly payments with different repayment options at https://studentaid.gov/loan-simulator.

OBSTACLE #4: Changing jobs

Workers between ages 18 and 24 change jobs an average of 5.7 times, and those between ages 25 and 34 change jobs 2.4 times, according to the U.S. Bureau of Labor Statistics. If you’re still young and don’t have a lot of money in your 401(k) plan, it’s tempting to cash it out after you part ways with an employer. But the short-term cash withdrawal comes with a significant long-term cost.

When you cash out a 401(k) or other tax-deferred plan, you’ll be required to pay federal and possibly state income taxes on the entire withdrawal, plus a 10% early-withdrawal penalty if you’re younger than 55. Yet despite this significant haircut, more than 40% of job changers take cash out of their 401(k) plans, and 85% of the ones who do withdraw the entire balance, according to research by professors at the University of Colorado, University of British Columbia and Texas State University.

That’s unfortunate, because it’s easier than ever to avoid a costly cash-out. Under current law, if you have a balance of at least $7,000 in your former employer’s 401(k) plan, your employer is required to allow you to leave it where it is. (If you have at least $1,000 but less than $7,000, your former employer is required to deposit the money in an IRA; for balances of less than $1,000, employers have the right to send you a check.) You may choose to leave the money in your former employer’s plan if you like its investment options and fees, but you won’t be able to make any additional contributions.

Rollover your old 401(k)

Alternatively, you could roll the funds into your new employer’s 401(k) plan. Most large plans allow rollovers, and it’s a convenient way to keep all of your savings in one place. To avoid taxes and penalties, you should arrange for the funds in your account to go directly to your new employer’s plan, rather than go to you first.

If you’re not impressed with your new employer’s plan or rollovers aren’t permitted, you can roll the money into a traditional IRA. Your funds will continue to grow tax-deferred, and you may have more investment options than your new employer’s plan offers. Again, arrange for a direct transfer of funds to avoid penalties.

Borrowing from your 401(k)

Finally, if you have an urgent need for funds in the short term, you can take what is effectively an interest-free loan from your account by withdrawing the money, depositing it in your bank account, and redepositing the funds into an IRA or other tax-deferred account within 60 days. However, your employer is required by law to withhold 20% of the withdrawal to cover taxes, and if you can’t come up with the money by the 60-day deadline, you’ll be on the hook for any additional taxes, plus potential early-withdrawal penalties.

OBSTACLE #5: No money for emergencies

Only 48% of American adults say they have enough in savings to cover three months’ worth of expenses, and 22% have no savings at all, according to a Bankrate survey. More worrisome, 36% of adults say they have more in credit card debt than in savings.

When confronted with a financial crisis, such as a job loss or medical emergency, it’s tempting to tap your retirement savings plan. Retirement may be years away, but your crisis is immediate. However, even a modest withdrawal from your 401(k) plan could jeopardize your retirement security, so you should view such a withdrawal as a last resort.

What is a hardship withdrawal?

The IRS allows 401(k) plan participants to take a withdrawal from their plan to meet “an immediate and heavy financial need,” which includes medical expenses, preventing foreclosure or eviction, tuition payments, funeral expenses, and expenses and losses related to a natural disaster. Depending on your plan, you may also be allowed to take a hardship withdrawal to purchase your primary home.

When you take a hardship withdrawal, you don’t have to repay the money. But that’s not necessarily a good thing, because you can’t put the money back, either. Worse, you’ll have to pay taxes — and possibly early-withdrawal penalties — on the withdrawal, which will reduce the amount of money available.

What is a 401(k) loan?

A 401(k) loan may be a better option, although it has some downsides, too. Depending on your plan, you may be able to borrow as much as 50% of your savings, up to a maximum of $50,000 over a 12-month period. Plans typically charge interest of one to two percentage points above the prime rate, which is currently 8.5%.

Unlike a hardship withdrawal, a 401(k) loan comes without restrictions on how you can use the money. Workers may choose to use these loans for everything from college tuition to making a down payment on a house. The loans can also provide a way to pay off high-interest credit card debt. And unlike other kinds of debt, you make the repayments to yourself.

Still, there are risks. If you leave your job, you must repay the loan by the due date for your tax return (plus extensions) in the year you depart the job to avoid taxes and possible penalties. And keep in mind that repeated loans from your 401(k) can do permanent damage to your savings. A T. Rowe Price analysis of 401(k) loans found that workers who borrowed frequently from their plans had lower savings rates than workers who took out a single large loan. When workers continue to tap into their plans for loans, it’s a sign of broader financial problems, says Rachel Weker, head of retirement services marketing for T. Rowe Price.

OBSTACLE #6: The rising cost of child care

The U.S. Department of Agriculture estimates that it will cost the average family $331,933 to raise a child born in 2023 until age 18 — and that doesn’t include college expenses. A big contributor to the total is the cost of day care, which has grown exponentially in recent years. The average family spends 27% of household income on child care, according to a Care.com survey, and nearly 60% of parents said they expected to spend more than $18,000 per child on care in 2023.

“So many parents are just barely keeping their heads above water,” says Peter Hoglund, a senior vice president at Wealth Enhancement Group in Warren, N.J., who has three young children.

What is a flexible spending account (FSA)?

To help rein in those costs, make sure you take advantage of all the tax breaks and workplace benefits available to you. Most large employers offer a dependent-care flexible spending account (FSA), which allows you to make pretax contributions of up to $5,000 annually. You can use the funds to pay for the care of children younger than age 13. To qualify, the care must be required in order for you (and your spouse) to work. You can also use the funds to pay for the care of adult dependents who are incapable of caring for themselves.

Eligible expenses include qualified child-care centers, a nanny or babysitter, before- or after-school care, nursery school, preschool, and summer day camp.

Money you set aside in an FSA is subtracted from your paycheck before income taxes are calculated, and it also avoids the 7.65% Social Security and Medicare tax. The benefits become more valuable as your tax bracket rises.

Tax credits for dependent children

Alternatively, if you paid a provider to care for your under-age-13 children (or a disabled dependent of any age), you may be eligible for a nonrefundable tax credit of 20% to 35% of qualifying expenses, up to a maximum of $3,000 for one child or $6,000 for two or more children. The Child and Dependent Care Credit can also help pay for the costs of caring for other dependents. For example, expenses related to care for an elderly parent can qualify for the credit, if that elderly parent is claimed as a de-pendent on the child’s tax return.

You can’t claim the Child and Dependent Care Credit for expenses paid with funds from your dependent-care FSA. The FSA usually provides more tax savings than the Child and Dependent Care Credit because the amount of the credit declines as your income rises. However, if your child (or dependent) care expenses exceed the $5,000 FSA limit, you can claim the credit for up to its maximum limit in out-of-pocket costs that aren’t covered by withdrawals from your FSA.

A flexible spending account may not be the only child-care benefit your employer provides. To attract workers in a tight labor market, a growing number of companies are subsidizing child-care costs or offering affordable day care on site. If you’re considering a job change, it’s worth asking potential employers what they’re doing to support employees who have young children or other dependents.

OBSTACLE #7: College costs

You want the best for your children, and for many families, that means making sure they get a good college education. If you struggled to pay off your own student loans, you probably want your children to avoid that fate. But your adult children may not appreciate your sacrifice if you run out of money in retirement and they end up supporting you.

529 plan

Consider contributing to a 529 college-savings plan, an account that offers tax-free investment growth and no taxes on withdrawals if you use the proceeds for qualified higher education expenses, such as tuition, room and board, books and supplies, and computers and internet access. Nearly all states offer a 529 plan, and depending on where you live, you may get a state tax deduction or credit on contributions if you use your own state’s plan. Most have no minimum-investment requirement, so even modest contributions will add up if you start early. Contributions from grandparents and others can help your savings compound and grow. As your child nears college age, consider other options that will keep costs down, from scholarships to advanced placement courses that will allow your child to earn college credits.

OBSTACLE #8: Health care costs

Even a well-funded retirement plan can be sabotaged by a medical emergency or chronic illness. The best defense against this retirement derailer is a good offense, which for many workers is a health savings account.

What is an HSA?

A health savings account provides one of the most effective ways to save for out-of-pocket medical costs, now and in the future. Contributions to an HSA are pretax (or tax-deductible, if your HSA is not provided through your employer), funds grow tax-free, and withdrawals are tax-free as long as the money is used for eligible health care expenses.

In 2024, you can contribute up to $4,150 to an HSA if you have an individual health insurance plan or as much as $8,300 if you have a family plan. If you’ll be 55 or older at the end of the year, you can add an extra $1,000 in catch-up contributions. To qualify for an HSA, you must be enrolled in a high-deductible plan, which in 2024 is defined as an individual plan with a deductible of at least $1,600 or a family plan with a deductible of $3,200 or more. The plan must limit out-of-pocket expenses to $8,050 for self-only coverage, or $16,100 for family coverage.

High-deductible plans

High-deductible plans typically have lower premiums than preferred provider organization (PPO) plans, which means you’ll have more money in your paycheck to contribute to your retirement savings plan. HSA funds can help you cover your plan’s deductible, and some employers will match a portion of your contributions. Unused funds can be rolled over to future years, and if you leave your job, you can take the account with you. You can withdraw money from the account, tax-free, at any time for medical expenses, and if you’re able to cover your current out-of-pocket expenses with other funds, you can use the account to save for medical expenses in retirement. Once you reach age 65, you can take penalty-free withdrawals from your HSA for non-medical expenses, although you’ll have to pay income taxes on the money.

The triple tax benefit that HSAs offer becomes even more powerful if you invest the money in the stock market, and most large HSA providers offer that option. However, research by the Employee Benefit Research Institute found that only 12% of account holders invest in assets other than cash. Putting money in your HSA’s cash account makes sense if you know you’ll need it in the near term for medical expenses, says Sharick, the CFP from Pittsburgh, but ideally you should try to invest at least a small slice of your account to get the most from the tax benefits it provides. Consider setting aside enough in your HSA’s cash account to cover your estimated co-payments, deductibles and other near-term medical expenses, and investing the rest.

OBSTACLE#9: Caregiving

More than half of employees identify as caregivers, according to a recent Bank of America survey, including 57% of women. Taking care of young children, elderly parents or both can force many people to cut back on their work hours or leave the workforce entirely, creating a significant barrier to saving for retirement.

If you’re juggling work and caregiving, start by looking to your employer for help. Although nearly 90% of employers offer some kind of caregiving support, only 41% of employees know about the programs, and less than one-third of working caregivers take advantage of them, according to the BofA survey.

Quit your job or hire a caregiver

You may be inclined to leave the workforce to take care of young children or aging parents because hiring a caregiver will consume most or all of your salary. But exiting the workforce involves more than giving up a paycheck, because you forgo the opportunity to contribute to your retirement savings plan, says Sharick, who specializes in providing financial advice to working mothers in their thirties. Taking time out of the workforce could also reduce future Social Security benefits, which are based on your 35 highest-earning years.

If you have no choice but to leave your job, you don’t have to abandon saving for retirement entirely. If your spouse has earned income, he or she can contribute up to $7,000 (plus $1,000 in catch-up contributions if you’re 50 or older) for 2024 to a traditional or Roth IRA on your behalf. If your spouse is covered by a 401(k) or other workplace plan, contributions to a traditional spousal IRA are deductible as long as your joint adjusted gross income is less than $230,000. The deduction phases out for AGI between $230,000 and $240,000.

Although your spouse contributes to the IRA, the account is in your name and is yours to keep, even if the marriage ends (see the box on page 59 for more on protecting your retirement savings in a divorce).

OBSTACLE #10: Running out of time to save

It’s not unusual for workers to reach their fifties and realize they haven’t saved enough to retire as early as they had planned. You can’t make up for lost time, but you can supercharge your savings. In 2024, workers 50 and older can contribute up to $30,500 to a 401(k), 403(b) or other workplace retirement plan — $23,000 plus $7,500 in catch-up contributions. If you’re eligible to contribute to a traditional or Roth IRA, you can sock away up to $8,000 in 2024 — $7,000 plus $1,000 in catch-up contributions.

Working longer can also make your savings last. For every additional year (or even month) you work, you will shrink the amount of time in retirement you’ll need to finance with your savings. Meanwhile, you’ll be able to continue contributing to your nest egg while giving that money more time to grow.

T. Rowe Price offers the example of a 62-year-old woman who earns $100,000 a year, has saved $900,000 and expects to spend $63,000 a year in retirement. If she retires at 62, there’s a 68% chance she won’t outlive her funds, according to an analysis by T. Rowe Price’s retirement income calculator. If she waits until age 65, her probability of success rises to 91%, and if she stays on the job until age 67, the probability of success rises to 97%. (Run your own projections at www.troweprice.com/usis/advice/tools/retirement-income-calculator.)