Retirement. Many of us spend a good portion of our lives working and saving for that light at the end of the tunnel. It’s a destination we all dream about and plan for. Many fantasize about luxurious vacations or buying a second home. But like it or not, the vision is not always the reality.
The recent recession has forced many people to cut back on expenses and put off saving. A study conducted by the ING Retirement Research Institute showed that nearly half (48 percent) of respondents aged 25 to 69 who are employed full-time and earn at least $40,000 a year don’t feel prepared for retirement. That’s despite the fact that 75 percent of the same group do contribute to their workplace’s retirement plan. In another Gallup poll, 66 percent of Americans ranked “not having enough money for retirement” as their top financial concern. This is up from 53 percent a decade ago.
There are more than 77 million baby boomers in the U.S., and seven people turn 50 every second. Our population is aging! And whether or not you’re included in this generation, you should be concerned. By 2040, there is a major shift projected in the balance of workers versus those who are retired and utilizing Social Security. In 1995, there was an average 2.5 workers supporting the payments of one Social Security recipient, and in the future, it is projected to be only 1.1. This means we will have a higher percentage of people pulling money out of the system than funding it.
Whether your retirement is first-class, coach or steerage, you need to prioritize retirement savings now. It’s unclear if Social Security will stand the test of time, but we do know the monthly payments are not enough for many people to live on. In fact, between 1991 and 2007, the number of Americans between the ages of 65 and 74 who filed for bankruptcy increased by an astonishing 178 percent.
All of this information may sound daunting, but there are some steps you can take to ensure your nest egg allows you to live comfortably in retirement. As you put your plan together, it is important to keep in mind that life expectancy is increasing about a month per year, so a 65-year-old person retiring today can expect a 20-year life expectancy, while their children need to plan for more than 25 years.
Strategies for Saving
Long-term investing is still the best way to grow your money, and this includes your company 401(k). Yet many people have a bad taste in their mouths because the average 401(k), held 10 years, is still worth less than it was two years ago—even with contributions and employer matches. Uncle Sam is trying to help with catch-up provisions that allow investors 50 and older to kick in an extra $5,500 above the regular $17,000 limit.
Rebalancing your portfolio is another strategy to help improve your ailing 401(k). The market (S&P 500 Index) is up more than 25 percent since October 2011. Revisit your asset allocation (how much you want in stock vs. bonds), as well as the diversification in each of these categories. Nearly half of all 401(k)s now have automatic rebalancing, and many have new investment offerings like Treasury Inflation Protected Securities (TIPS) that can be very advantageous.
Next, and probably most important, step up your contributions. Only 23 percent of participants have boosted the amount they’re saving in the past year—20 percent are actually contributing less. It’s interesting that we hear reports that the American public is saving more—this is where it counts. Try to get 10 to 15 percent of your income into your plan; investing an extra $500 a month only costs you $360 out-of-pocket if you are in the 28-percent tax bracket.
Finally, keep your eye on the costs of your plan. A long-term investor in a 401(k) plan that charges 1.5 percent in annual expenses is likely to end up with a 20-percent smaller nest egg than someone in a plan that costs 0.5 percent. Try to take the extra step of finding out the costs of the underlying investment choices available to you.
Taking control of your savings and building up your nest egg is a good start. You may also want to consider working longer. You can start receiving Social Security at age 62 (as it stands now); however, the amount you receive will be 20 to 30 percent lower than if you waited until age 65 to 67 (depending on when you were born). You’re also not required to take minimum distributions from your retirement accounts until age 70½, or even later from your employer’s retirement plan if you are still working and not a five-percent (or more) owner.
There are numerous opportunities to save for one’s retirement. The good news is that you have a lot of control over the size of the eventual nest egg. It’s important to educate yourself on what’s available, stay disciplined, keep diversified, pay attention to costs and tax ramifications, and remember that the earlier you start, the better. There is definitely light at the end of the tunnel, and with a little planning, you can be riding in style. iBi
Daryl Dagit, CFP, is a financial advisor with Savant Capital Management.
For more information visit savantcapital.com.