Are you worried about saving what you’ll need for retirement? Well, you’re not alone. Only about 25% of us are on track to have saved enough, according to a new research paper from Morningstar. The good news is that the research suggests that making modest changes to our behavior and retirement timeline will dramatically improve our savings potential – to have enough to enjoy a successful retirement.
Morningstar’s research concludes that even most “mass affluent” households don’t have enough. “Mass affluent” is defined as a household with individuals making $75,000 or more, with investible assets of $100,000 or more. According to the study, 55% of those folks aren’t even on track to save what they’ll need to last their retirement years, under normal market conditions. Less than one-third of those same people would have enough under bad market conditions. So even many investors who have accumulated significant wealth and savings over the course of their working lives won’t have enough to last their retirement years.
Yogi Berra, the famous New York Yankee catcher, once said, “If you don’t know where you are going, you might end up someplace else.” So, if you are in the wealth accumulation phase of your life, it’s especially important to take stock of where you are, financially, and where you wish to be when you decide to call it quits.
Some financial experts say you should have a specific multiple of your income by retirement. Others say you need $1 million in retirement savings. Others subscribe to the old, out-dated, 4% Rule. It says you should withdraw no more than 4% from your retirement savings each year to maintain a steady income stream throughout retirement, without running out of assets.
A famous computer scientist named Andy Tanenbaum once joked, “The greatest thing about standards is there are so many to choose from.” The same is true for those financial rules of thumb. As Cutter Family Finance readers know, how much you will need in retirement is, of course, specific to you. There’s no right or wrong answer: It depends on your lifestyle, your health, your spending habits, and your plans during retirement.
But one thing’s for sure – Americans are spending more years in retirement than ever before, thanks to improving health care and other factors. In fact, Americans should plan to spend 22 years in retirement on average, according to GoBankingRates.com.
Forewarned, as they say, is forearmed. So, with this knowledge in hand, let’s look at some options to make your investments last throughout your golden years? Your first reaction may be to make extreme changes to what you are currently doing – for example, saving lots more now by depriving yourself of small luxuries you have grown accustomed to. Or you may plan to work much longer than you initially anticipated. You can dramatically reduce your living expenses, either now or later, by doing something such as downsizing to a much smaller home.
Hmmm . . . those are some tough options.
Well, the good news is that according to Morningstar’s research, those tough options are not always your only options. In fact, combining reasonable changes to your pre-retirement savings schedule and retirement age could multiply their individual effects.
Take two simple steps, if you haven’t already – delay retirement age until 67 and put away at least 6% of your salary. Just by doing those two things, the percentage of American households with sufficient retirement savings jumps from 25.6% to 71.2%, according to Morningstar. And for mass affluent households, taking these two steps boosts retirement readiness from 45.3% to 72.9%.
Let’s break down those figures a bit. The average retirement age in the United States is 63, according to the U.S. Census Bureau. By delaying your retirement another four years beyond the average, you’ve generated four additional years of income, savings and accrued additional interest on your investments. That gives you a big leg up as you transition from the accumulation to the distribution stage of your financial life.
If you’re like most Americans, Social Security will be one of your most important income streams in retirement, so it makes sense to maximize this benefit when you can. For folks born in 1960 or later, 67 is also Full Retirement Age (FRA) for Social Security benefits – the first year you can collect 100% of your benefits (your Primary Insurance Amount, or PIA).
Now let’s talk about how to hit that 6% savings goal. If you aren’t at least at that 6% number, you may need to adjust the mechanisms and tools you’re already using. That includes increasing contributions to employer-sponsored retirement savings plans, or opening a traditional or Roth IRA.
Many employers offer matching contributions to their retirement programs, but they will enroll employees at low contribution rates. If your employer offers a matching program and you’re not taking full advantage of it, you’re leaving money on the table.
And remember, investors age 50 and older who were already hitting their 401(k) and IRA contribution limits are eligible to “catch up” their retirement savings by making additional contributions.
The annual contribution limit for IRAs is $5,500 up to age 50, $6,500 from 50 on. The contribution limit for 401(k) plans rose from $18,000 to $18,500 for everyone in 2018, while the catch-up contribution remains at $6,000. So, workers age 50 and older can contribute up to $24,500 per year.
Automate your savings. Let computers do the work and use funding services that connect with your bank accounts. And finally, pay yourself first – when you receive a raise or bonus, divert that amount into your retirement savings instead of spending it.
If you’re not already on the right track to financial security in retirement, the good news is that you can get there by making modest changes in behavior now and setting realistic goals.
Remember – you don’t always need to swing for the fences. Base hits win games.
Be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
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