8/20/2012 3:18 PM ET|
Retirement steps for late planners
To retire well, you should prepare well in advance. But if you're in your 50s and haven't started planning yet, these steps are the place to start.
Once people reach their 50s, they finally see retirement on the horizon. They start envisioning that time when they can stop going to work and instead spend their days on the golf course, on the beach or with their families. Yet many people have not saved nearly enough for retirement by the time they are 50. A recent survey by the Employee Benefit Research Institute, or EBRI, found that 60% of workers born between 1946 and 1964 have less than $100,000 for retirement. In fact, 40% have saved less than $25,000.
24/7 Wall St. interviewed retirement-related experts from brokerage firms, banks, retirement advocacy groups and independent financial advisers. With their help, 24/7 identified the eight actions you should take if you have not prepared to retire.
Financial advisers generally recommend people begin saving for retirement starting in their 20s to take full advantage of compounding interest. Although the financial advisers who spoke to 24/7 Wall St. say it is very hard to give concrete estimates on how much should be allocated toward equities and fixed-income investments, they say it is best to cut risk as one approaches a target retirement age.
Not saving up enough for retirement used to be less of a problem. Workers in previous generations often received pensions from their employers, allowing retirees to know exactly how much money they would get once retired. But employers have increasingly shifted that responsibility onto the employees through 401k and other defined-contribution plans.
These days, notes Joe Ready, the executive vice president for retirement at Wells Fargo, people get married and have children later in life than previous generations did. This means it is increasingly hard to save for retirement during the 40s and 50s because people still face heavy financial obligations -- they are paying off their mortgage, sending their children to college and so on.
The fact that many current retirees are living off pensions has conditioned younger generations to think their retirement might be the same, says Lule Demmissie, the managing director of retirement for TD Ameritrade. "Face it," Demmissie says, "your retirement isn't your parents' retirement."
Demmissie notes that people in retirement today are working until a later age and finding cheaper housing, as they no longer can count on a pension that was once provided to employees. She also points out that while in the past many people have never saved enough for retirement, the problem has become worse since the financial crisis took hold.
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By the time you reach age 50, you should have roughly four times your annual income built up in retirement, according to Jean Setzfand, the vice president for financial security at AARP.The best way to reach that goal is to sock away money, starting in your 20s. But if you are well behind on your goals by the time you reach your 50s, all hope is not lost.
These are the eight things to do if you have not planned for retirement.
No. 1: Reassess life priorities
Part of reassessing priorities is ensuring you have a plan in place. People should have a retirement plan when they are significantly younger than 50, yet the EBRI finds that only 42% of workers of all ages have a retirement plan.
If, at the age of 50, people find themselves inadequately prepared for their dream retirement, they should start by looking at the future, Setzfand advises. "The first thing people should do is consider, 'What do I want to do with the rest of my life?'" The answer to that question will help decide what actions need to be taken, she explains. Before moving forward, it is important to ask such questions as "Do I really need that second house in Florida?" or "Can I afford to start a trust fund for my grandkids?"
People need to consider how much they are willing and able to fund their children's college education. Setzfand notes that many parents in their 50s will foot most or all of their children's college bill to make sure their children don't end up with debt early in life. However, she cautions people to be careful and make sure they have enough money to build and sustain their own retirement nest egg. After all, you can't borrow to fund your golden years.
No. 2: Take advantage of increased contribution limits
If you are late saving for retirement, you may need an extra boost to get closer to your goals. Once people reach 50, the amount of money they can contribute annually to their 401k and their IRA increases from $17,000 to $22,500 and from $5,000 to $6,000, respectively. Employees should take advantage of these higher contribution limits if possible, since contributions to these plans are often tax-deductible.
Plus, many employers match contributions up to a certain amount, meaning that employees are forgoing free money if they do not contribute enough to get the maximum employer match. "If you have access to a 401k, jump into it with two feet," Ready says.
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No. 3: Downsize
Advisers also recommend downsizing. While the level of downsizing for some could mean simply cutting down on small expenses such as eating out and shopping, for others, more drastic measures may be necessary.
"Downsizing often isn't something that can be done on the peripheral," Demmissie says. For some, it may even mean downsizing the house, especially if there is a lot of equity on the property.
Those eyeing retirement can even plan to move in with their adult children. Demmissie notes there has been an increase in multiple generations living under one roof. While living with children is not necessarily part of most people's dream retirement, it can help make sure retirees do not outlive their money by cutting out housing costs and even some home-care costs. Moving to places with lower tax rates and costs of living, Demmissie notes, may also help people live their more ideal retirement at a lower cost.
No. 4: Keep working
With people living longer than generations past did, the traditional retirement age of 65 is generally increasing and will continue to do so. About 40% of current American employees plan to continue working until at least age 70, according to a 2011 study by the Transamerica Center for Retirement Studies.
Working until a later age, whether full or part time, gives people more time to build their nest egg while also reducing the likelihood that they will run out of money during their golden years. Plus, if someone truly enjoys his or her job, continuing to work in some capacity is not necessarily a bad thing. "I always believed retirement was fictional," says John Sestina, the founder of John E. Sestina and Co. in Columbus, Ohio. "Why does someone have to quit working if they are productive, and what are they going to do to replace that in their life? You can only play so many rounds of golf."
People still need to take into consideration that their employment status could change due to circumstances such as a layoff or deteriorating health, says George Middleton, an adviser with Limoges Investment Management in Portland, Ore. "A lot of my clients say they will just keep working," he says. "I always tell them, 'But what if you can't?'"
- Calculator: How much will your 401k provide?
No. 5: Factor in health care costs
Another burden facing retirees in the relatively near future is rapidly growing health care costs. A 65-year old couple who retires in 2012 should plan for $240,000 for medical costs, according to a study by Fidelity Investments, provided the couple does not receive employer-sponsored health coverage. This figure, on average, has risen 6% annually since 2002.
Diane Pearson, a financial adviser at Legend Financial Advisors in Pittsburgh, says higher health care costs in recent years have changed the way she has counseled clients on retirement. She used to try to get her clients' nest eggs to accrue 2% more than inflation each year, but now that number is close to 6% due to rising health costs.
"People generally underestimate the amount of money they'll need in retirement," Pearson says, noting that health care predictions play a major role in that underestimation. "The rule of thumb has been spending 75% to 85% in retirement of what you were spending while you were working full time. I think that's absolutely false." Pearson says the amount spent in retirement likely will be about the same spent in your working years.
No. 6: Don't play catch-up
If someone has failed to save enough for retirement by his or her 50s, it may be tempting to build a portfolio full of stocks to play catch-up. The financial experts interviewed by 24/7 Wall St. generally advise against this move. While some stocks are still important in a portfolio to help manage inflation, a bad stretch in the stock market can completely devastate a person's financial goals. "That's financial suicide," Sestina says about such a move. "They can't afford the risk with so little time."
Middleton says he counsels his clients to take on as little risk as possible to reach their retirement goals. Someone who has not saved anything for retirement by age 50 would need to take more, but not excessively more, risk than someone who has saved since his or her 20s. "I just warn (clients) that the plan might not work," Middleton says.
No. 7: Beware of financial scams
When people have not saved enough for retirement, they feel overwhelmed and are willing to take drastic measures to try to reach their retirement goals, including falling for financial scams such as the "get rich quick" and "work from home" schemes. Those ages 60 and older lost at least $2.9 billion due to these scams in 2010, according to a recent joint study from MetLife Mature Market Institute, the National Committee for Prevention of Elder Abuse and Virginia Tech University.
Setzfand says that when people are approached about financial products, they need to do research to make sure the product really can help achieve their financial goals. She also recommends that people do some research on the broker trying to sell the product to make sure no sanctions have been levied on that person. "If something looks too good to be true, it's too good to be true," Setzfand says.
No. 8: Do not skimp on insurance
While socking away a higher portion of your income in your 50s may help build up a dream retirement fund, it is important to keep up with insurance payments to prepare for the unexpected. Life insurance and long-term care insurance can ensure that a person's spouse or children aren't financially devastated in case of unfortunate events.
Since life insurance is relatively affordable, Middleton says he has not noticed many people going without it. However, he is concerned that many are forgoing long-term care insurance due to its high cost. He says not having long-term care insurance can "completely destroy an estate" if a spouse needs that level of care in the future.
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I'm 57 and have only 77k saved. that's not much.
I should get 1600.00 and my wife 500.00 from SS
Not near the 4000.00 we currently "struggle " to live on.
No trust funds in the kids future, just good advice. Save
money early and often and don't wait like Pa Pa did.
"Nest egg should accrue 6% over inflation rate to cover health care costs" - where the hell can I get that deal, Ms. Pearson?
Increased costs of government in the form of fees and taxes need to be factored in, too.
In Sunnyvale, CA we annually see utility prices go up with no improvement in service. It has actually declined. The mandatory fee for "meter reading" has doubled in seven years. The meters have not been changed for over 15 years. Police officers can and do retire at 50 years of age and collect $14K per month - yes, per month. Health insurance is included. This is from a city of 120K residents.
Simple parking tickets are $57. Traffic offenses cost $240 to $500 for minor infractions. The government is attempting to balance the budget on the backs of the accused. The government exists for itself and not the people.
So, it is an increase of $5 here, $10 there but it adds up. Retirees on fixed incomes are standing in the bread lines.
I agree with Stumpy One -how can someone save who does not earn $150,000 a year while they
are struggling to pay the every month bills? Not me.
Also, I wish people would not get on the comment areas and advertise dating sites, etc. - it's for comments - not advertising for lonely people.
The information provided is scary. I cannot believe that we will have to pay about $240,000 for health care on top of Medicare. This seems to be an unrealistically high number. I could believe this if there were no Medicare. My father who passed away at 90 was in a nursing home and had very little out of pocket expenses. I had to go over his financial records after he passed away and I would guess that he had less than $30K of expenses. He also had to pay 100% for his meds. When Part D was passed, he did not realize what he had to do to get coverage and never did.
Who needs life insurance in retirement? Just make sure that you spouse has enough money to live on. Life insurance is for young people to protect your family against an accidental death.
The savings rate in the USA is abysmally low. Without Social Security, we would be in even worse shape. Many certainly would have to move in with their adult adult children. Even with Social Security, I have always believed that a person needs around 10 to 15 times your annual salary saved to supplement whatever you will get from SS. How many are on that tract when more than half have less than $100K saved?
No, the place to start is reading the handwriting on the wall and getting repositioned in a career/job that won't fail and wipe you out. If this has already happened, then it's time to survive and start over again, this time taking on FEW IF ANY responsibilities, living without, or downright going uninsured.
Even doing this, is your net worth even safe these days? We just don't know. There's always gold... no guarantee there, either.
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Get your emergency fund together now if you want to avoid stumbling over costly surprises in the future.
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