It's crunch time! There's no way around it. The result of a lifetime of money habits will make itself abundantly clear. Your financial future depends now on a candid assessment of how well you've stuck to planning thus far.
If you're among the roughly six out of 10 individuals who has never tried to calculate what they need in retirement, do it pronto. That figure is like a destination on a map, giving you direction as you save, invest and create your overall financial plan. If you set a retirement savings goal, but you've forgotten about it, it's time to dust it off for a careful review. "You should be looking at your plan periodically, at least every three years," says Dick Bellmer, president of National Association of Personal Financial Advisors.
Kick off retirement savings
- Set realistic goals.
- Call in the experts.
- Take advantage of catch-up contributions.
- Time your exit.
- Tackle debt.
- Prepare for the unexpected.
1. Set realistic goalsFirst item for consideration: Your savings and investments thus far. Hopefully, you've been stashing funds away consistently, making maximum contributions to things like 401(k) plans and IRAs, as well as other accounts. These days, individuals 55 and older are on track to replace roughly 55 percent of their income during retirement with personal savings, Social Security and pension income, according to a recent study by the Fidelity Research Institute. That means they'll have to live on 45 percent less cash each month once they retire.
How much is enough? That depends on your lifestyle and expenses, potential medical bills and the kind of support you'll have from, say, a pension plan and Social Security. But, as you review your savings goals, be careful not to set the bar too low. Thirty-nine percent of current retirees say they underestimated their spending, and expenses increased in retirement rather than going down, according to Fidelity Research. To find the amount you want to have set aside, read "5 steps for figuring out your 'big number'."
"People typically don't downsize," says Harold Evensky, a Certified Financial Planner in Coral Gables, Fla. "It's not uncommon for them to spend more in retirement than less."
2. Call in the expertsWith that in mind, it may be a good idea to seek a little professional guidance to ensure you're setting realistic goals. When asked in a recent poll by Employee Benefits Research Institute what was the most helpful thing they did to save, most respondents said it was hiring a financial adviser.
Ray Ringston, 79, says that hiring his financial adviser was one of the best moves he's made. "I've never been interested in the money game," says Ringston, who calls the prospect of managing investments "boring."
Instead, Ringston hired an independent investment adviser to do the job. "He's done exceptionally well and I believe he's trustworthy. If I had to do it over again, I would have tried to find someone in my 40s."
3. Take advantage of catch-up contributionsOne of the first things a pro will encourage you to do is to keep saving. If you're still working and over 50, there are ways to catch up. You can begin putting more money into tax-sheltered retirement accounts such as 401(k)s and IRAs. This year, individuals age 50 or older can save up to $20,500 in a 401(k) and up to $5,000 in an IRA.
Take advantage of these opportunities. "It's not hopeless!" says Dee Lee, a Certified Financial Planner and author of "Women & Money."
To illustrate, Lee describes a couple that decides to tighten their financial belts. If each contributes $10,000 a year to a 401(k) plan, they'll have about $90,000 each after 7 years, assuming the money grows by 7 percent a year.
Now for the caveat: In order to earn that 7 percent, you've got to be willing to take on some risk. Historically, stocks have earned just over 10 percent a year, while bonds have clipped along at roughly 5 percent. If you're unwilling to invest in stocks, you may well wind up short of your goals.
"The question besides 'What do you need?' is 'What is your risk preference?' "says Bellmer. "It doesn't matter that you might need a 10 percent rate of return. You might not be able to handle the risk associated with that."
Nevertheless, bold or not, planners will say most people in their 50s are too young to flee to the safety of cash instruments. "This is not the time when you go to cash," says Ellen Rinaldi, executive director of investment counseling and research at mutual fund group Vanguard. "You may stay 50-50 in stocks and bonds. But you're going to need growth in your portfolio."
4. Time your exitSavings and investments alone may not be enough to adequately fund your retirement. Planning also means making some vital life decisions, too.
You may want, or need, to delay retirement. If so, you'll have plenty of company. These days many workers are opting to "downshift" into retirement by working part-time or longer than they'd originally planned. A study from Putnam Investments found that 7 million retirees returned to work within 18 months. Among those, 32 percent said financial reasons prompted their decisions. And close to four out of 10 who went back said that if they could do it differently, they would have saved more in their company retirement plan.
On the upside, those who do return to work generally take advantage of their chance to catch up or get ahead. For example, they save 11 percent of their income on average. And their household incomes average $86,600, far higher than the typical $54,200 annual income for nonworking retirees, Putnam found.
There are other advantages, like intellectual and social stimulation, that prompt many to keep working. That's something Ray Ringston understands.