Create a roadmap
Life is full of unexpected expenses, and it’s not always easy to save as much as you want for retirement. While saving for retirement is an expense that’s easily put off when you’re younger, the pressure builds if you procrastinate too long. As you move into your 40s, 50s and beyond, you have to focus on retirement planning and save as much as you can so you can eventually retire and lessen the risk that you’ll run out of money.
“If you’re in your 40s, there’s still plenty of time,” says Joe Jennings, investment director with PNC Wealth Management in Baltimore. “Twenty years is a long time, if you’re looking to retire when you’re 65, to still be able to meet your goals. It’s important to sit down then and, as you get closer to retirement, to think about your goals and re-evaluate them.”
Max out your company retirement plan
Your company-sponsored 401(k) or 403(b) plan is the first place you should turn when building up your retirement savings. If your company provides a match, that will help you increase what you can save. It’s like getting an instant 25 percent, 50 percent or sometimes even a 100 percent return on your investment, depending on your employer’s plan.
Be sure to contribute enough to get the full match or you’ll leave money on the table. For example, if the plan requires you to contribute 6 percent of your pay to get the full match, defer at least that much into it. If you can contribute even more, do so. Those funds are generally taken directly out of your paycheck, so you won’t have the opportunity to spend them on something else.
But don’t stop at 6 percent if you can afford to defer more. Many financial planners recommend you sock away 10 percent to 20 percent of your income all through your career. “You should be maxing out your retirement plan, putting as much as you can in it,” says John Corn, CPA, an investment adviser with Buckingham Asset Management in St. Louis. In 2010, the maximum you can contribute to a 401(k) or 403(b) plan is $16,500 for employees up to age 50.
Contribute to a traditional or Roth IRA
Once you’ve maxed out your company-sponsored plan, if you can find some extra money in your budget, consider starting or adding to an IRA or a Roth IRA, says Evan Shorten, a Certified Financial Planner with Paragon Financial Partners in Los Angeles.
“If you haven’t saved as much as you could have, you’ll need to cut your expenses and find some money in your budget so you can save more,” he says. “Or, if you get a bonus, you could earmark some of the money from that bonus and use it to fund an IRA or a Roth IRA.”
Even if you can’t max out the IRA, putting something into it is better than nothing. You could set up an automatic transfer of $50, $100 or even $200 per month from your checking account into an IRA and increase that contribution as you get raises or once your kids are through college and you have some extra money.
Use catch-up contributions
Once you turn 50 or older, you can take advantage of catch-up contributions, which allow you to contribute extra money to your retirement plans, says Corn. For company-sponsored 403(b) and 401(k) plans, you can contribute an extra $5,500 on top of the $16,500 allowed for everyone — for a total of $22,000. For an IRA or Roth IRA, it’s an extra $1,000 per year on top of the $5,000 contribution limit for everyone.
That’s especially important if you didn’t save enough when you were younger. Catch-up contributions enable you to save more at a later life stage, even if you can’t totally get caught up to where you might have been had you started saving earlier.
Re-evaluate your asset allocation
It’s important to re-evaluate your asset allocation every year. The level of risk you were comfortable with in your 40s may not work for you as you move into your 60s, says Shorten.
If you haven’t been able to save as much as you’d like, you might need to invest a bit more aggressively than you would otherwise. “Do you need to take more risk?” says Corn. “You can give yourself the chance to have more growth by upping the percentage of stocks in your portfolio. It could blow up on you if the markets go down for a while, but it could give you extra growth if things go your way. Most people don’t want to do this, and it’s something we use as a last resort suggestion.”
Consider your retirement lifestyle
Your retirement lifestyle includes how you want to live in retirement and when you want to retire. “Some people are comfortable working longer than they originally planned to, if that will help them save more money and delay the time when they start spending their retirement funds,” says Jennings. “Rethink your retirement objectives. You may be able to work part time in retirement.”
You can also make adjustments to how you plan to live in retirement, says Corn. “It’s about lifestyle, it’s about how you want to live,” he says. Maybe you had thought of buying a second home in retirement, and instead, because you haven’t saved as much as you wanted to, you might have to downsize to one smaller home.
Deciding when to take Social Security is another factor, because you can get more monthly income if you wait until full retirement age, which for some people is as high as age 67. If you’re married, you have two decisions to make. It might make sense for one spouse to take Social Security as early as possible and the other to wait, Corn says.
These days, individuals are responsible for saving enough money for their own retirements. Invest some time in studying your options and determining your risk level so you can allocate your assets accordingly.