April 17, 2019
Mention the word “retirement” and many Americans break into a cold sweat—or laugh as though you’ve made a joke. Retirement, in the comfortable sense, may be a distant goal for many. According to a new survey from GOBankingRates.com, 42% of Americans will “retire broke,” meaning they have $10,000 or less saved for their retirement. If you’re one of this group, don’t despair: Even if you’re close to retirement age, it’s never too late to start saving.
Let’s say you’re 50 and you’ve got nothing saved for retirement...so far. What should you do? Here’s a road map to get going with your retirement savings plan.
If you’re 50 and hope to retire around age 65, that means you have a solid 15 years to build a retirement savings. If you have an employer-sponsored retirement plan, start there.
“The maximum for people 50 and over [to save for retirement] is currently $24,000 a year,” says Alexandra Baig, an Illinois-based CFP®. “At the very least, contribute the amount the employer will match. If you can live without the current tax deduction and your employer offers a Roth 401(k) option, contribute to that instead of the traditional.”
If you’re self-employed or your employer doesn’t offer a 401(k) plan, look into individual retirement accounts (IRAs) where you can contribute on your own. While you won’t have a match, you’re still building your savings—and moving in the right direction.
To make up for lost time, experts recommend individuals starting to save for retirement at 50 should aim to save 30% of their income each year.
But if saving the maximum of $24,000 or 30% of your income annually is too steep, don’t worry: Saving something is better than nothing. To find out what you can start putting away for retirement savings, it’s time to start budgeting.
Take a look at your monthly earnings and spending, and see what can be repurposed toward retirement savings.
“Create a realistic budget to determine how much cash you have left from your take-home (after-tax) income after paying your other required expenses, such as mortgage, property taxes and insurance, utilities, food, clothing, personal bills, and medical bills,” says Baig. “Look very hard at any optional expenses such as recreation or eating out that you can cut down or eliminate.” Any unnecessary spending that can be reallocated toward retirement will not only be saved with tax benefits but it will grow from compound interest over time.
Speaking of interest, Baig recommends cutting back on credit card usage and/or never carrying a balance. “Don’t put anything on a credit card that you cannot pay off in the same month to avoid wasting money paying high interest,” she says. “This will maximize how much money you can commit to retirement investments.”
The longer you can work, the better your retirement savings will be. By deferring tapping into your savings, you’ll let that larger pool of money continue to grow. You’ll also maximize your Social Security earnings by waiting to start collecting (especially if you wait to retire until age 66 or older). Additionally, your continued earning potential means you’ll continue to add to your savings while also (most likely) requiring fewer lifestyle changes.
Be savvy when it comes to your investments. You’ll want to pick an appropriate risk level that fits with both your retirement savings goal and maintaining your lifestyle.
“Pick an investment portfolio that allows for some growth,” Baig says. If you begin investing for retirement at age 50 and plan to work until your mid- to late-60s, “then you still have a long- to mid-term time horizon,” she says, “which means you can tolerate some market swings. To the extent possible, do not invest in any fixed-income instrument that yields less than the average expectation for long-term inflation (generally 2%).” To mitigate the risk for late-starters of outliving their money, Baig recommends portfolios that favor equities. To maximize the returns for the investor, she suggests low-cost investments such as index funds.
“As you get closer to retirement, divide your money into ‘buckets’,” she adds, “one for use in the first 10 years of retirement, one in the next 10, one in the final 10. Move only the first bucket into the more conservative investments. Keep the other two in more aggressive investments until it gets closer to the time to tap each.” This way, you’ll balance out your risk for the money you need soon while enabling the money you’ll need later to continue to grow.
A final thought: Once you’ve started your retirement savings, resist the urge to tap into it to cover other expenses (or to attend the Super Bowl). Retirement accounts are savings vehicles that come with tax penalties for early withdrawals, and you’ll simultaneously erase the benefits of compound interest on a larger account balance.
“Do not, for any reason save a real emergency, take funds out of your retirement savings,” says Baig. “If it becomes a choice between helping your kids pay for college and keeping up your own retirement contributions, go with the latter. Your kids can borrow to fund college and pay it back over their long working lives. You cannot borrow to fund retirement.”
Finally, you may still be feeling anxiety about your retirement, but remember: The most important step is just getting started. Working with a financial advisor to start may be a worthwhile investment, especially if you feel overwhelmed. (Pro tip: Check with your human resources department to see if any retirement advising services are available to you as a benefit.)
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