Retirement security is at the top of most individual or family goals. Yet retirement savings is often very low for many investors. The average median retirement account savings for working individuals and families ages 30-62 is under $100,000.1 There are many contributing factors to this but failure to plan appropriately is one of the leading causes. Keep reading for nine strategies you can implement right now that can help you get caught up on your retirement savings.
1. Pay off high consumer debt
Develop a plan to pay off higher interest credit cards first. If you have a balance of $10,000 on a credit card at 18 percent, you are paying $1,800 annually in interest alone. At that interest rate, make it a priority to pay that off before you invest more toward your retirement. You should contact the credit card company and ask to have your interest rate lowered for a period of time. Once credit card debt is paid off, get in the habit of spending only what you can afford to pay off each month after investing into your retirement. Caution: Cancelling credit cards after balances are paid off can have an adverse effect on your credit report. So just be careful and do your research.
2. Live below your means
The wealthiest individuals that I have met all spend much less than they make. Many Americans live above their means or spend more than their net annual income. This prevents them from being able to develop a plan to invest or save more for their future retirement. It is very important to budget by making a list of all fixed expenses: Mortgage, car payment, utility bills, etc. Consider your retirement plan as one of those fixed expenses and pay your future self first. This will help you identify and eliminate wasteful spending and what is left over for discretionary spending or investing.
3. Max out your 401(K) or other employer retirement plans
In 2016 the maximum employee contribution to a 401(k) is $18,000 for individuals under age 50.2 You should consider the additional $6,000 catch up contribution if you are age 50 or older. This could mean the difference between success and failure in reaching your retirement goals. Many times company 401(k) plans have an employer match. Think of this as “free” money. At the very least, you should contribute to your employer plan as much as your employer will match. If you can’t afford to max out your retirement plan, commit to making small increases annually or use your raise to increase your contributions until you are maximizing.
4. Contribute to a traditional IRA or Roth IRA
Once you are contributing the minimum to receive a company match or maximizing your company retirement plan, you may choose to contribute to a traditional or Roth IRA. The contribution limits of an IRA are $5,500 (under age 50) or $6,500 (50 and over) for 2016.3 For those who are married filing joint tax returns, your income must be less than $184,000 to qualify to make Roth IRA contributions.4
5. Don’t be too conservative
It is very important for any investor to identify the most appropriate investment model based on comfort level and risk tolerance. However, in order to help achieve a productive rate of return that is greater than the inflation, you will have to find the right balance between stocks and bonds. It is easy to mistake an investment guaranteed not to lose principal as safe but if you had all or a majority of your assets in these low-yielding investments, then average inflation would erode assets over time. For example, if the majority of your assets are invested in a Certificate of Deposit or Money Market earning 1 percent and average inflation is 3.5 percent than those investments are negatively affected by inflationary risk. In order to have a productive rate of return, your overall return should outpace average inflation.
6. Postpone retirement
Delaying your retirement can have a huge impact on retirement security. You should be able to continue saving into your retirement account while you are working. Every additional year that you work will be one less that you have to distribute growth and income from investment accounts. Delaying social security will likely provide a higher annual income benefit as well. Benefits increase substantially for every year you wait past full retirement age up to age 70. There is also a decrease in benefits if you elect to receive at age 62 or below full age of retirement.5
7. Work part-time in retirement
Recent studies have shown a decline in physical and mental health in retirees.6 Working part time may have many benefits above and beyond the additional income. For many folks who have been working all of their lives and who may not be involved in many different hobbies or activities, working part timecan provide a sense of purpose to be involved and engaged daily.
8. Be strategic about social security
I encourage every client to treat their social security as an investment. Each investor’s circumstances are unique and help determine the right time to begin receiving social security benefits. If you retire prior to your full age of retirement and elect to receive benefits at age 62, you may receive up to a 30 percent reduction in benefits.7 This reduction may have a significant consequence if you live into your 90s. If you decide to work to age 70 and are born in 1943 or later, you can receive an 8 percent increase in annual benefits from full retirement age up to age 70.8 One spouse may decide to take social security early and another delay. I recommend working with a financial advisor to evaluate the best scenario for your situation.
9. Downsize or sell your home
A primary residence is one of the largest assets that an individual or family has acquired. For those who do not have enough savings for retirement, downsizing or even selling your home may be a solution. Many folks decide to downsize as they simply no longer need all of the room that they required while they were raising their family. Selling your home can also reduce maintenance costs and property taxes. It is best to evaluate all options and decide what is best for your situation.
These are a few of the most popular strategies used to help investors catch-up in retirement savings. Remember that proper planning and goal setting is important to keep you on top of your retirement planning. The strategies presented are for general information only and are not intended to provide specific advice or recommendations for any individual. We recommend that you discuss your unique situation with your financial advisor, evaluate and implement any necessary changes to help you meet your retirement goals.
1. EPI Analysis of Survey of Consumer Finance Data, 2013