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What To Do When You Haven’t Saved Enough For Retirement

What To Do When You Haven’t Saved Enough For Retirement

Time To Tune-Up Your 401(k)

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If you’ve come to the realization that you haven’t saved enough for retirement, then this article is for you.

It details various strategies for increasing your odds of being able to afford retirement. The strategies fall under three primary categories: saving, investment and additional options for retirement income.

Before delving into them, there is a fourth category to discuss: psychology. Funding retirement is first and foremost a math problem. Either you have enough in savings, Social Security benefits, pension benefits and other sources of income, or you don’t. No amount of anger or self-loathing is going to change this. Harping on past poor decisions and bad luck won’t change reality. The situation you are in today is the situation you are in today. Constantly focusing on the past won’t help you now.

This isn’t to say you should ignore the past. Quite the contrary: To the extent that the lack of adequate savings is due to past mistakes, it can be helpful to review them. For example, perhaps you panicked during the last bear market and waited too long to get back into stocks. Maybe you made bad investment decisions that caused you to underperform. There could have been a lack of a concerted effort to save more. Whatever the cause, think about what you can change now and in the future to prevent the same mistake from recurring.

How Much Do You Have?

Before addressing the problem of not being able to afford retirement, it’s important to know the scope of your potential shortfall.

The very first step is to assess your financial situation. Simply put, how much do you have saved? How much is in your retirement accounts? How much is in your savings accounts? Once you have done this, take a look at your liabilities. How much do you owe? What is your current ability to make your mortgage, your car loan and credit card payments? Finally, look at your necessary and discretionary spending. Doing so will tell you how much flexibility you have to boost savings.

This information will help you establish a budget. In creating the budget, be realistic. If you enjoy meeting your friends every Saturday for golf or you’re hooked on HBO, then you’re going to have hard time stopping either. You might, however, find it easier to drink the office coffee instead of stopping at Starbucks every day or hold onto your cars for longer periods than replacing them every two to five years.

Budgeting is like diets: Both are easier to stick to if they are not too strict. With both dieting and saving, it’s often easier to start with small changes and evolve from there. Perhaps you can figure out how to free up an additional 1% of your salary to contribute to retirement (and opt for grilled instead of fried food). From there, you can make further changes allowing you to move closer to your long-term goal.

Next, look to see how much in Social Security benefits you can expect given your present income and work history. You can find this out by going to the Social Security Administration’s web site. Be sure to look at your full earnings record to ensure there are no errors. If you’re married, have your spouse do the same. Keep in mind that higher future earnings years will help to offset lower earning past years. Plus, Social Security benefits are adjusted for inflation, which means they will increase over time.

If you’ve worked or are working at a job with a pension, speak to human resources about what your benefit is. Also ask when you will qualify to receive it. If you are married, ask if a survivor benefit is available and what effect registering for it has. (The survivor benefit makes your spouse eligible to receive the pension, though not necessarily the full benefit, should you die first.)

Once you have this information, you can get an idea of how much retirement income you will have. A simplified equation for determining how much you will be able to spend during your first year in retirement is Social Security benefit(s) + pension benefit(s) + 4% of retirement savings. The 4% figure is the percentage of retirement savings that can be initially withdrawn without incurring a high risk of outliving your savings. (The initial amount withdrawn is adjusted upward each subsequent year for inflation.) This formula works best for those near or at retirement age. (It mostly gives you a pretax figure. Retirement savings in a Roth IRA or Roth 401(k) account will generally not be taxed if withdrawn past the age of 59½.) Those who are younger will need to make assumptions about how much they will have saved. The various retirement calculators available online can help, though their estimates may vary.

You can then compare your projected retirement income against your likely expenses. While work-related expenses such as commuting and dry cleaning will go away, you will have much more free time to fill up once retired. As such, your actual spending may not go down as much as you think. Still, you can start by estimating your fixed expenses and likely discretionary expenses to get an idea of what you will need. Any deficit between your projected income and your projected expenses is the hole you need to fill.

Basic Strategies For Catching Up

Beyond establishing a budget, the first goal for any person saving for retirement is to take full advantage of the matching contribution offered by their employer. Even in a 401(k) or similar type of defined-contribution plan with less-than-ideal expenses and investment options, taking full advantage of the employer match can be highly beneficial. It is free money that usually exceeds the plan costs. [Roll the account over to a brokerage account, mutual fund family or a more attractive 401(k) plan when you leave the employer if the plan has high cost, poor investment options or you want more control and flexibility.]

Similarly, those with pensions should be sure to understand all the rules regarding receiving the maximum benefits as well as the rules regarding survivor benefits.

Beyond saving more, a very beneficial step you can take is to work longer. Working longer both increases the number of years savings can be contributed and reduces the number of years withdrawals will be taken from retirement accounts. If someone has a life expectancy of 85, (the approximate actuarial average for a person turning 65 at the time this article is being written, according to the Social Security Administration), retiring at 65 requires savings to last 20 years.

Postponing retirement to age 70 both allows for five more years of savings and shortens the withdrawal period to 15 years. Assuming a person is able to set aside the 2017 maximum 401(k) contribution limit of $24,000 ($18,000 maximum plus $6,000 catch-up for those aged 50 and older), delaying retirement by five years and continuing to save equates to an additional $120,000 of retirement savings before any employer match, additional savings (e.g., Roth IRA contributions) or positive investment returns are accounted for.

Figure 1 shows how much in savings can be accumulated if a person starts at age 50 and realizes a rate of return equal to the historical average for a 60% stock/40% bond allocation. Its biggest lesson is the importance of saving and investing continuously over a long period of time.

Figure 1
Figure 1

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Figure 1

Obviously, the actual amount of retirement savings will depend on an individual’s circumstances, but there are other advantages to postponing retirement. Every year no money is withdrawn from retirement savings is an extra year those savings can benefit from compounded returns. A growing body of research is finding that postponing retirement is also beneficial to a person’s health.

Then there is Social Security. Social Security benefits increase by approximately 7% every year claiming is delayed. Postponing claiming from age 62 to age 70 will boost the monthly benefit by 76%. The size of benefits will also be increased if a higher earning year replaces a lower earning year. (Social Security benefits are based on the 35 years of highest earnings.) Should your spouse claim benefits on your record, her or his benefit will also increase—as will the survivor benefit. [Working married couples may find it beneficial to consult with a financial professional well versed in claiming Social Security benefits or use a tool such as Social Security Solutions to determine the most optimal strategy.]

Once these steps have been taken, seek to use the tax code to your advantage. Traditional individual retirement account (IRA) contributions can be made by those not covered by a workplace savings plan. The deductibility is phased out for taxpayers whose adjusted gross earnings exceed a threshold (partially above $99,000 and fully at/above $119,000 for married filing jointly…

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