4 steps that beat clipping coupons

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It’s time for a mid-course correction: How close are you to having enough money saved to retire comfortably by the time you are ready to retire?

Using data from the Federal Reserve’s 2013 Survey of Consumer Finances released last week, the Center for Retirement Research at Boston College found that the median 401(k)/IRA balances of working households nearing retirement fell from $120,000 in 2010 to $111,000 in 2013.

The center points out that if a retiring couple buys an annuity with the $111,000, it will provide $500 a month in income at current annuity rates — an amount that isn’t adjusted for inflation. That won’t buy you much.

If you haven’t been a diligent saver all your life, how are you going to make it work?

Take these four steps to ensure that you won’t be chowing down on dog food in your later years. Many people pride themselves on smart money management. They clip coupons and go out of their way to pay a few pennies less for gas, but doing these four things will make a much larger difference in the quality of your later life than you’ll ever gain by nickel and diming your spending.

Figure out how much you really need to retire. Fidelity Investments says that 85 percent of your current income is a good rule of thumb, but John Sweeney, executive vice president, retirement and investment strategies at Fidelity, says that presumes that you’ve been saving 15 percent of your income and that when you retire, you’ll stop saving and start spending. If you’ve been spending up every penny you earn, then 85 percent may lowball your need in retirement. If you have been saving and you also can pay off your mortgage, Sweeney says that estimate of “income replacement needs” could drop below 70 percent.

How replacement ratio varies by income level

Pre-retirement income Estimated replacement ratio
Less than $50K 90%
$50K-$80K 88%
$80K-$120K 82%
More than $120K 70%

Source: Fidelity Investments

The best way to know for sure is to write down everything you’re spending now and add it up. That will give you a starting place — then you can subtract what you don’t think you’ll spend in retirement. It’s a boring, tedious task, but it is enlightening. Bankrate’s budgeting calculator can get you going. 

Review your Social Security. The Social Security Administration estimates that benefits typically replace 40 percent of household income. Sign up for a MySocialSecurity account and get an estimate of what you personally can expect to receive. Note that beginning this week the administration will resume sending out printed statements to workers at ages 25, 30, 35, 40, 45, 50, 55, and 60 — only if they haven’t registered for a digital Social Security statement.

It is also smart to use a sophisticated calculator that will help you analyze how much more Social Security you qualify for by working longer and by using strategies available to spouses. Figuring this out isn’t intuitive or readily available on the Social Security website, so get help.

Figure how much more you can save. Use a calculator that will show you the impact of saving more and investing in a smarter way. Fidelity’s free retirement paycheck calculator shows the impact of saving more in an IRA, a 401(k) and a health savings account — all tax-advantaged vehicles. Maybe the most enlightening part of this is the difference that even a small increase in return on investments makes.

Stop the leaks. The Center for Retirement Research also points out that lowering fees can make an enormous difference in how much retirement savings you accumulate. The center provides this example: An investor began saving at age 29 in 1982, contributed 6 percent of his salary and received a 50 percent match from his employer. He allocated 50 percent of the money to stocks and 50 percent to bonds. He would have theoretically accumulated $373,000 by the time he turned 60 in 2013.

But this calculation ignores expenses. The center figures that average expenses would have reduced this saver’s balance to $314,000 — a big bite. Look at what you are paying and choose the best deal. Your human resources department ought to be able to help.

Saving for retirement isn’t rocket science. It just feels that way. But if you can clip coupons and figure out where to buy gas for less, you can do this, too. And it will make a much bigger difference in the long run.