Ever have that uncomfortable feeling you haven’t saved enough for retirement? A retirement that’s not that far off?
You’re not alone. It’s not uncommon to worry about the size of your nest egg. And truth is, many people are behind in their retirement savings. In fact, nearly half of American adults age 55 and older have no retirement savings. At all. (This frightening fact comes from a report on retirement security from the Government Accountability Office.)
If you find yourself starting to sweat about whether you’ve saved enough to carry you through 20-30 years of retirement, take heart. More than likely, there is still time to bolster your savings. Maybe not as much time as when you were in your 20’s, 30’s or 40’s, but time enough to make a difference.
7 steps to catch up
1. Ask, “What do I want my retirement to look like?”
Don’t skip this step! Retired life varies from one person to the next. Depending on your wants (Make that bucket list!), your retirement may look very different from someone else’s. Yours could cost less. Or more. Maybe your neighbor has the travel bug, but you don’t. Maybe your cousin is planning on leaving a bundle to his or her children, but you aren’t. You may be content to enjoy hobbies that don’t cost much or take you far afield. See where we’re going with this?
We’ve noticed that many people don’t spend a lot of time thinking through what they’d like to do in retirement. It’s almost an afterthought. Not a good idea. Especially since your retirement lifestyle will help you determine just how much more you need to save.
2. Save more
If you’re still working, seize the opportunity to ramp up your savings. Here’s how.
Does your employer offer a 401(k) plan – and a match? Defer 15% of your salary (or as much as you’re able) into that 401(k). You can defer up to $19,000 this year in a 401(k) plan. And don’t forget catch-up contributions! If you’re age 50 or older, you can add an extra $6,000, for a total of $25,000.
Stashing money in an IRA, will also help. You can contribute up to $6,000 in an IRA this year, and if you’re age 50 or more, you can add another $1,000 as a catch-up contribution, to make it $7,000. (It’s a good idea to check with your tax or financial advisor before making “non-deductible” IRA contributions. Also, remember there are income limits to post-tax “Roth” IRA contributions.)
Taxable investment account
If you’re fortunate enough to have a bit left over every month after paying the bills, we like the idea of funneling that money into a taxable investment account. This is a simple step of sending a regular amount each month to your bank or favorite mutual fund. Most mutual fund companies have “automatic” investment plans that can be set up, where you direct a certain amount to be withdrawn each month from your bank and used to purchase shares of the fund you’ve selected. While long-term investment accounts have more opportunity for growth (all that compounding!), even small, regular contributions in your later years, can add up.
3. Spend less
This is where things can get uncomfortable. Spend less to save more. Easy, right? Not really.
You’re probably accustomed to a certain standard of living. Maybe you’re attached to handcrafted drinks at your local coffee shop. And you really look forward to eating Sushi at your favorite hotspot on Fridays. Then there’s the wine club on the weekend. Or snow skiing. Or motorcycle racing. (Could be!) These little indulgences add pleasure to your life. They’re not bad. They just add up. We bet you’d be amazed at how quickly discretionary costs add up. Movies. Hobbies. Vacations. Pets. Electronics. Decorating. Updating. Shopping. Gifts for the family. Etc.
Get a clear picture – track your expenses
There are so many ways you can innocently undermine your savings. We’re not saying you can’t enjoy these fun extras (in moderation), but do track how much they’re costing you. Because they are. This means actually sitting down and tallying your discretionary expenses (or these days, using an app to do it for you). Guessing won’t cut it. Do the hard work of recording your outflow. Chances are, you may be in for a shock. But a cold dose of reality isn’t such a bad thing if it inspires you to cut your spending.
And here’s a tip that’s been around for a while, so maybe it goes without saying. When it comes to buying a car (a major expense), resist the temptation to buy “new.” Many dealerships now specialize in “certified pre-owned” or “almost new” vehicles – good cars at good prices. The hard truth is that yes, you really do see the value of your brand new car drop by 20-30% the day you drive it off the lot. You could save a boatload of money just by buying “pre-owned.”
4. Slash debt
Debt isn’t pretty. Get rid of as much of it as you can. It can seriously hamper your ability to save for retirement. Car loans and credit card bills (all that interest!) can suck you dry. It’s hard to save when your money is already spoken for.
For debts you do carry – even your home mortgage – think about making an additional payment each month, so typically, twice monthly payments, versus once per month. Or as often as you can. Extra payments can substantially reduce the interest you pay over time.
Older Americans and debt
The sad news is that older Americans are carrying more debt than ever before. According to the Federal Reserve Bank of New York, people in their 60’s held more than $2 trillion in debt as of June 30th – an increase of 67% from the beginning of the recession in 2007.
Here’s the simple truth: If you have too much debt you can’t save. And if you can’t save… Well, that impacts your retirement.
5. Work more
We’re not suggesting you work until you die, but consider working a few more years than you had planned, maybe even part-time. Or doubling up and working overtime or a second job. However you do it, increasing your income helps. It delays the time when you have to start tapping into your retirement savings (or at least reduces how much you must take out), which is a key variable you can control. Working longer also gives you more time to save.
Working in retirement is increasingly becoming the norm. A 2014 survey from Merrill Lynch found that 72% of those age 50 and older plan on working during their retirement, either for the money or because they enjoy the social connection and mental workout.
Living in a smaller home or condo can potentially save you a significant amount of money. Typically, housing is one of the largest expenditures people incur. A monthly mortgage, homeowners insurance, utilities, property taxes and home maintenance combine to pack a powerful punch to your pocketbook. By downsizing to a smaller home (and maybe in a less expensive area), any money saved can be diverted directly into your retirement account.
A majority of people we work with who initially favor keeping their large homes during retirement, find that the burden of upkeep, maintenance costs and taxes takes a toll, eventually wearing them down to the point they decide to move to a smaller place.
7. Delay Social Security
Instead of taking Social Security when you’re first eligible (generally age 62), think about waiting until your “Full Retirement Age,” which, these days, will be age 66 to 67, depending on your date of birth. Many people even wait until they’re age 70. Each year past your full retirement age that you delay taking your benefit, you increase it by 8% (until age 70). On the other hand, if you start taking your benefit as soon as you are eligible – and before your full retirement age – you decrease it by as much as 25%. Ouch. Not helpful when you’re behind on retirement savings.
While not required, Social Security “optimization” software tools now available (we have a few of the “pro” versions) can sure help make the decision-making process easier.
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It is absolutely possible to catch up on retirement savings. But you must have a plan. And the diligence to stick to it.
Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.