According to a recent article on money.cnn.com, starting a disciplined savings regimen as early as possible is the key to living a more comfortable retirement. If you’re willing to spend less today, then you have a better chance of having enough to spend tomorrow.1
The article gives an example of a 48 year old man who hasn’t saved anything for retirement. The average 401(k) account balance for a man this age is $116,000, according to Vanguard. The article also states that someone his age should have “…savings equal to roughly five times annual salary to be on track toward replacing 70% to 80% of pre-retirement income after retiring.” In contrast, the average annual social security benefit is only approximately $16,000. This barely covers the basics, so he will likely be relying pretty heavily on his savings to get him through 20-30 years of retirement. Given these benchmarks, he has a lot of catching up to do. Since he’s accustomed to living on 100% of his salary, it won’t be easy, and making this change will have a big impact on his lifestyle. Below are a few important strategies that CNN recommends to help get your retirement savings plan back on track.1
Recommended Target Savings Rate
It’s recommended that you save 15% of your annual salary. However, in this man’s situation, he should be saving closer to 20% or more. If it’s too difficult to adjust to this right away, you can start lower and increase the amount by a percentage point each year. The article gives the following scenario to demonstrate how this strategy can make a difference.
“… someone who earns $60,000 a year, receives 2% annual raises and saves 15% of salary a year, would have a nest egg totaling just under $400,000 after 20 years, assuming a 6% annual return. Save 20% a year, and that figure increases to roughly $530,000.”
While this strategy isn’t meant to support lavish living, it can significantly improve your retirement lifestyle.1
Workplace Retirement Savings Plan
It’s best to save for retirement via a workplace savings account such as a 401(k) due to the tax advantages that these types of plans offer. Not only are your contributions pre-tax, but many companies offer an employer match program which is essentially free money. Plus, your contributions are automatically deducted from your paycheck, making it easier to stick to your savings regimen.1
IRA’s With Catch-Up Contributions
If your employer doesn’t offer a 401(k), you can benefit from similar tax advantages by investing in a Traditional or Roth IRA. “So if you contribute the max to an IRA over the next 20 years, including catch up contributions when you hit 50, and earn a 6% annual return on those contributions, you would have an account balance of just under $250,000.” Not bad for getting such a late start! The downside with these plans is that even with catch up contributions, the maximum allowable amount you can contribute on an annual basis is still less than with a 401(k).1
Taxable Savings Account
Another way to supplement your nest egg is by investing any extra savings in a regular taxable account. The article recommends stock and bond index funds because of their low fees and the fact that they’re relatively tax efficient.1
Working Longer
Working a few extra years can also help improve your retirement outlook. This strategy can offer a couple benefits. Delaying retirement increases your social security benefit amount. Plus, it gives you the chance to save more and allow your investments more time to grow. In addition, “Every extra year you spend in the workforce is also one less year your nest egg has to support you, which, all else equal, lowers the chances of your money running out.”1
Tapping Home Equity
If you own a home, another way to supplement your retirement income is with a reverse mortgage. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan (FHA). A reverse mortgage enables seniors 62 or older to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, call 800-218-1415.
1 48 Years Old and Nothing Saved for Retirement – money.cnn.com, by Walter Updegrave, 6/22/16, http://money.cnn.com/2016/06/22/retirement/no-retirement-savings/.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz