Catching up with retirement savings
Living comfortably in your 60s, 70s, and beyond requires planning. Here are some guidelines for knowing how much to save.
How much will I need?
Everyone’s savings goals are different, based on income levels and post-retirement expectations, but financial professionals have some general recommendations. At age 30, people should aim to have saved one year’s pay; 40-year-olds should shoot for three times their salary; by age 67, the goal is 10 times one year’s salary. To live well, most financial planners recommend that you have enough savings and income to provide 55 to 80 percent of your pre-retirement income every year. Of course, these rules of thumb are imprecise. To estimate more specific savings targets, individuals must factor in their personal circumstances, including expected expenses in retirement, when they want to retire, their health, and how long they are likely to live. “Be as detailed as you can be about what you want the next phase to look like,” said Howard Pressman, a certified financial planner in Virginia. “People who have a really good idea about what they’re going to do have more success than those who don’t.”
What can I do to save more?
Maintaining a budget and tracking spending is the best way to spot additional opportunities to save and become more disciplined. “Keep your lifestyle in check and make sure you are putting money away every month,” said Jeff Rose, a certified financial planner and founder and CEO of Alliance Wealth Management, a financial planning firm. With spending under control, retirement savers can direct more money into 401(k) plans, individual retirement accounts, and other savings vehicles. In 2018, the IRS-set contribution limit for 401(k) plans—as well as 403(b), 457, and similar employer-sponsored plans—is $18,500; for IRAs, it’s $5,500. People ages 50 and older can save even more: Catch-up contribution limits for 401(k)s and IRAs are $24,500 and $6,500, respectively.
What if I can’t save enough?
Investing wisely can help money grow faster. For example, the highest yield on a savings account, as of mid-July, is 2.05 percent, according to Bankrate. (The national average is a measly 0.9 percent.) But a five-year certificate of deposit earns up to 3.25 percent. The stock market promises even better returns: Over the past 10 years, a period that includes the Great Recession, Standard & Poor’s 500-stock index—a benchmark often used to represent the overall U.S. market—has gained an average of 8.5 percent a year, according to investment research firm Morningstar. That earning power, over time, makes a major difference. In 20 years, $10,000 grows to more than $15,000 given an interest rate of 2.05 percent a year and monthly compounding. But at 8.5 percent a year, $10,000 increases to more than $54,400. Certain investments even offer regular payouts, which can be particularly useful for retirees who are no longer receiving paychecks from work.
Which investments produce income?
Dividend-paying stocks offer big gains and regular payouts. The Dividend Aristocrats, companies in the S&P 500 that have increased their dividends annually for at least 25 consecutive years, offer particularly good options, including 3M, Coca-Cola, and Exxon Mobil. Bonds are the go-to choice for traditional income investors. U.S. Treasury bonds are the safest option, with the 10-year Treasury yielding about 2.9 percent. Investment-grade corporate bonds typically offer higher yields with more risk: The S&P 500 Investment Grade Corporate Bond Index was sporting a 3.9 percent yield to maturity, as of the end of June.
How else can I make my money last?
Homeowners may consider a home equity loan, home equity line of credit, reverse mortgage, or cash-out refinance. Each option comes with certain eligibility requirements, repayment terms, and risks. Other ways to turn a home into income include renting a room or part of the house, and downsizing. “Home equity has been the forgotten asset of retirement planning for years,” said Jamie Hopkins, co-director of the Center for Retirement Income at the American College of Financial Services.
What about working longer?
Continuing to work and generate income—whether full-time, part-time, or gig by gig—allows pre-retirees to earn more, save more, and build up higher Social Security benefits. But it’s not always up to workers how long they’ll continue to hold jobs. There’s always the possibility of getting fired or laid off, and health issues—either yours or your spouse’s—may force you to retire sooner than planned. In fact, nearly half of retirees left the workforce earlier than they expected, and among those, 41 percent did so because of a hardship such as a health problem or disability, according to the Employee Benefits Research Institute’s 2018 Retirement Confidence Survey. “So by all means plan on working an extra year or two or three to enhance your retirement security,” says retirement planning specialist Walter Updegrave. “But don’t slack off on saving now because you think you’ll be able to compensate by extending your career.”