Get back on retirement savings track
The basic rules are still good ones: Cut expenses, save more
“If you can enter retirement without debt, you have so much more flexibility.”
One morning you’ll discover, to your horror, that the grizzled pre-retiree in the mirror is you. And, upon reflection, you might also realize that the old fella’s retirement plan isn’t exactly on track.
You could be behind in your retirement savings for any number of reasons. A layoff in the family. Two massive bear markets in 10 years. College. A sick relative. Or — and let’s be honest — you just haven’t thought about it.
Now it’s time to get back on track. Is it easy? Nope. But it is possible.
Reduce expenses
First things first: Estimate how much money you’ll need in retirement. A general rule is that you’ll need about 80% of your current income in retirement. After all, you won’t be commuting to work — or saving for retirement, for that matter.
But many retirees find that they spend about the same amount in retirement as they did when they were working. They travel more, for example, and eat out with friends more often. As people get older, however, expenses decline, according to the Employee Benefit Research Institute.
One of your best moves may be to see how much of those expenses you can reduce or eliminate. “If you can enter retirement without debt, you have so much more flexibility,” says Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards.
You could refinance your mortgage to a term that matches your retirement date, assuming you can afford the payments. People over 50 spend 40% to 45% of their income on home and homerelated items, EBRI says. Eliminating your mortgage would slash your expenses.
But a better way would be to pay extra on your mortgage. You can skip the extra payment if times get tough. “If you have a month where all hell breaks loose, you can relax a bit,” Blayney says.
If you have any consumer debt, such as credit cards, do your best to pay them off. Paying off a debt that charges 20% interest is the rough equivalent of earning 20% on your money. You’re not going to find that anywhere else.
Boosting income
For many people, the easiest way to boost income in retirement is to delay retiring. Pushing back retirement even a few years will give your savings time to grow, and reduce the amount of time you’ll need to make your retirement last. And that’s important: A 65-year-old man can expect to live to 83, and a 65-year-old woman will live, on average, to 85. One out of 10 65-year-olds will live to be 95.
The other advantage: You’ll collect more from Social Security. While you can collect a minimum benefit at 62, you can increase it considerably if you wait until 70. For example, if you were born in 1943 or later, your Social Security benefit will increase by 8% for each year between full retirement age and age 70.
In some cases, it may be worth living off your savings until you reach age 70 to get the largest Social Security payout, Blayney says. An inflationadjusted lifetime payout is extremely valuable. How valuable?
You can buy an inflation-adjusted annuity through Vanguard, the mutual fund company. A $400,000 deposit will get a 65-year-old man a monthly initial payment of $1,552 to $1,677, depending on the insurer. The payment would be adjusted for inflation each year, payments would stop at death, and the insurance company keeps any balance.
Saving more
The simplest solution to getting back on track: Save more. People often think that their investment returns are what decides how much they’ll have in retirement. In reality, the amount you save is the single biggest determinant of how much you’ll have.
You can put a maximum $17,000 into a 401(k) savings plan this year. If you’re 50 or older, you can stash away another $5,500.
Tax savings ease the bite from your salary. For example, if you earn $100,000 a year and contribute $17,000 to a 401(k), you’d be socking away $327 a week. Because your contribution reduces your taxable income — and hence your taxes — your salary would fall by $214 a week.
Eleanor Blayney, consumer advocate
Always contribute at least as much as the company match, if any. Free money for retirement is too good to pass up.
Even though you want to catch up, don’t sink all your money into a red-hot fund in the hopes of making money quickly. Red-hot funds soon grow cold, and if you’re nearing retirement, you won’t have time to make up for big losses. Consider a target-date fund, which gears its investment mix to your estimated retirement date. If you want, divide your money between one aimed at your retirement date and one aimed 10 years later. You’ll need money then, too.