Falling behind on saving enough money for retirement?
Here are some tips, courtesy of Kyle Acre, financial adviser with Edward Jones of Blair; Brian Brown, a certified financial planner for First National Wealth Management in Omaha; and Richelle Johannes, vice president, Two Rivers Bank.
No one knows exactly how many years of retirement income they’ll need. The U.S. Census Bureau’s average American-resident life expectancy is 78.5 years, but many Americans live much longer.
“No one wants to reach age 85 or 90, and then run out of money,” Acre said. “It’s tough to decide how many years to plan for. But we plan for rising income in retirement, and usually at a minimum plan for a person to live to age 90 or 95, or a 25- to 30-year retirement.”
Acre said computer modeling shows soon-to-be-retired investors how much savings they need for their circumstances.
“We factor in things like current savings, projected pensions, projected Social Security, expected taxes, what is the expected performance of your investments — before and in retirement — and withdrawal rate on those investments, and how much the individual would like to spend in retirement,” Acre said.
Brown said couples and individuals need to be willing to live within their means when thinking about retirement.
“Be flexible,” Brown said. “You might need to reduce your expectations about spending, and prevent overspending by making a realistic budget for now, and for later.”
“It’s important to work with a financial advisor to develop a financial plan for the future — and stick with that plan.”
Acre said that even though a financial adviser is profiting from their services, it’s still useful to have a professional that not only knows how markets work, but can also be the voice of reason —and do the math.
This type of third party is especially needed when other intense personal issues cloud up the choices, such as death or illness of a loved one. The market itself can be an emotional issue.
“A financial adviser can often bring clarity when the market is volatile, and there is a great amount of uncertainty,” Acre said.
401(k) and other retirement plans
If an employer is offering to match all or part of a regular 401(k) retirement plan deduction, make sure to take full advantage.
In some cases, employers or 401(k) managers have detailed policies that might allow employees to increase the amount set aside from each paycheck.
“A person should make sure they are fully utilizing any employer 401(k) or other retirement savings plan match,” Acres said. “You are essentially receiving an immediate return of whatever they are matching — 100 percent, 50 percent, or what the match is.”
Using the term “right-sizing,” Brown describes cost savings in selling a home and buying one that meets needs better. A smaller, more energy efficient house can save money on cooling and heating, upkeep and property taxes, and that money can go into savings.
“Use your equity,” Brown said. “See if you can live more efficiently.”
At some point, saving money takes self-discipline. However, regular banks have some tools to help make it a little easier.
“Don’t force savings to happen,” Johannes said. “But set yourself up to save regularly and consistently.”
Two Rivers, like many banks or credit unions, has a savings account that allows people to save through automatic transfers from another account.
The bank’s “Set-a-Goal Savings” requires a monthly transfer of $25 or more, and allows only six pre-authorized withdrawals each month. It does not, however, require a minimum balance.
Acre also likes these types of built-in safeguards against spending temptations.
“’Out of sight, out of mind’ is very powerful,” he said. “This can help you save more than you would expect. Also, the benefits of dollar-cost averaging lets you buy more of the market when its down and less when it’s high.”
Acre encourages savings plans to be realistic — especially if time is not on one’s side. Sometimes, the amount of saving needs to increase dramatically to reach a goal.
“The the best thing you can do is save as much as possible,” Acre said.
Holding out a few more years
Acre said contributing to savings by working for a few more years might be one of the answers.
“One should consider the possibility of delaying retirement a few years,” Acre said. “Or working part-time in retirement to supplement any shortfalls.”
Brown said delaying the beginning of Social Security income can help in a couple of ways. Not only does a retirement savings continue to grow, but different retirement ages have certain advantages.
“If you start taking benefits at age 62, you get about 75 percent of your Social Security,” Brown said. “If you wait until you’re 66, you get 100 percent. If you wait until ages 66 through 70, you get an extra 8 percent per year that you’ve waited, in terms of lifetime benefits.”
Which debts are killing
you the fastest?
Reducing debt is important to most people in concept, but many of us approach it on a put-out-the-closest-fire basis. Don’t simply pay off credit cards and loans — go after the high-interest debt first.
“Make sure any high-interest credit cards or high-interest loans are paid off,” Acre said. “Usually, any interest on this type of debt (depending on rates) is greater than the returns to be expected with a well-diversified retirement portfolio. It’s important to enter retirement without these major debts, if possible.”
Stop and think before buying
No one wants to stop and analyze accounts whenever it’s time to get a new vacuum cleaner or washing machine. Yet major purchases that go over budget can set a whole cycle of bad savings events into motion.
“An individual needs to seriously take a look at their budget and determine if they can afford to save an extra $100 or $500,” Acre said. “Once that is determined, the best way is to dollar-cost-average that amount on a monthly basis automatically out of your account and put that towards retirement.
“Given that most people do not have the time or knowledge to research individual stocks we highly recommend investing in mutual funds,” Acre said. “It’s important to
work with a fund family that has a consistent and reliable track record
and reasonable fees. All funds have fees.”
Popular investment tools
Some of the same retirement savings tools are still as popular as ever. However, one tool that’s become more prevalent is the Roth IRA. Unlike a traditional IRA, where deductions aren’t taxed but taxes are paid upon withdrawal, taxes on Roth accounts are paid on the front end.
“A Roth IRA provides tax-free income in retirement, and no required minimum distribution at age 70.5,” Acre said. “It’s a great legacy-planning tool, and it helps balance taxes paid in retirement.”
More high-yield investments?
Acre and Johannes both said it’s easy for an older person to see they’re behind on savings and make more risky investments. But both pointed out that the risk might involve not only current and future income, but also the savings and interest already in the bank.
While specific investment advice should come from a licensed professional adviser, Johannes said the hope for local bankers is that their clients to succeed.
“We wouldn’t like to see anyone go into a bunch of crazy investments later in life, and then lose all their money,” she said.
Acre said while the temptation for, say, a 55-year-old person to invest as if they were 25, there simply isn’t enough time to recover from a loss that results from a high-risk loss, so a risky approach isn’t advised.
“It’s important to fight the emotional force to sell low and buy high,” he said. “As you approach retirement it is important that the risk of your portfolio decreases — not increases.”