Don’t Have Enough Money to Retire? Here’s What to Do Next.
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If you have little or no retirement savings, you are not alone. A recent survey by BankRate.com found that 40 percent of working Americans save less than 5 percent of their paycheck, with half of those saving absolutely nothing.
A Harris poll from 2011 found that almost one in four Americans saved nothing by age 65.
However, the good news is that because Americans live longer, that extra time can be used to allow savings to compound, even for people who have nothing saved by age 65. Assuming someone will need retirement savings into their 80s means that even a first-time saver can benefit from investments that have 15-year time horizons, like stocks do.
So, the first thing you have to do to remedy the situation, (at any age), is start saving.
Right now. Today.
While this likely means working more, finding an outside income to provide extra savings and cutting down on expenses, there are a few things that can work in your favor.
Factors in Your Favor
According to U.S. census data, 79 percent of workers work for an employer that offers a 401(k) style retirement plan. That means that if you are working, you likely have a tax deferred means of savings for retirement already.
Because many companies offer an “employer match” to retirement plans — which can range from 2-5 percent of the employees’ contribution — you can boost your savings immediately, just by starting.
For 2018 the limit on employee contributions to 401(K)s is $18,500 for those under the age of 50 years of age. For ages 50 and older, the limit is bumped up to $24,500.
In fact, at age 50, I began using outside sources of income, from radio and TV work, to fund my regular expenses and directed the money from my 401(k) qualifying job into the maximum yearly benefit. Depending on your tax bracket and the state you live in, this strategy can also offer some tax benefits to you. But as always, check with your accountant for specific benefits.
Even if you start late, saving can make a huge difference. For instance:
- A 50-year-old who has saved nothing, who contributes $1,000 per month at a return of 7 percent annually will have $507,536.38 by age 70.
- A 50-year-old who has saved nothing, who contributes $2,000 per month at a return of 7 percent annually will have $1,015,072.75 by age 70.
And of course, you don’t stop investing or saving at age 70. Here’s an even more extreme example:
- If you are aged 65 and start saving $300 per month, at a 7 percent return compounded annually, you’d have $93,331.43 at age 80.
While that doesn’t seem like a lot of money, it will seem like a small fortune at 80 years of age if you need the money.
What if I don’t have a 401(k)?
If you don’t have an employer-sponsored retirement plan, you can still save and get some tax relief as well.
In fact, if you don’t have a 401(k) because you are self-employed, the tax benefits of having an alternative to a 401(k) provide additional incentives to save.
Alternatives to a 401(k)
- Traditional IRA (Taxable)
- Roth IRA (Non-Taxable)
- Whole Life Insurance
- Taxable Brokerage Accounts
There are advantages and disadvantages for each of these alternatives. For example, the contribution limits for IRAs are $5,500 ($6,500 if over 50 years of age), much lower than 401(K)s.
Annuities are often ideal for lump sum contributions like inheritances or settlements and offer tax deferment, but they have high fees and often get a bad rap in the industry because of the fees.
Whole life insurance is generally reserved for people who have maxed out all other alternatives or for the very wealthy. However, because you can borrow against the paid-up value of the policy, they can also replace your cash reserve while offering a death benefit. Additionally, a lot of people have paid-up life insurance policies that they purchased when they were young. These policies can be converted for retirement purposes.
All of these products and vehicles are complex. I strongly urge people to sit down with good financial professionals when deciding on what to buy or a strategy to follow.
Don’t Forget These
In any retirement discussion, people often forget two key areas: Home equity and healthcare.
People often ask, will I need the equity in my home for retirement? The answer to the question is, unless you are really rich, yes. Even if you are rich, the answer is still is probably yes.
Some people may not have saved much, but still have equity in their house. How much equity you have will always figure into your discussion about retirement.
Additionally, Fidelity Investments calculates that the average retired couple will have $280,000 in healthcare costs in retirement. Most people don’t know how they are going to pay for those expenses.
My guess is that the rest assume that Medicare will take care of all the expenses. The truth is that the financial planning industry, until recently, has not done a great job talking about healthcare costs, even for those people who are saving a lot of money.
In addition to deductibles, supplemental healthcare insurance and medicines, growing numbers of people will need short and long-term care that is not funded by Medicare. A 2017 study by Genworth showed that caregivers – family members — pay out around $10,000 on average for out-of-pocket expenses while assisting a loved one.
That’s about 10,000 reasons to start saving now.
The moral of the story is that it’s never too late to start saving for retirement. And remember — it’s never too early to start either.