Saving for retirement is a function that is often put on hold by those who feel they have sufficient time to start planning and saving later. While it is never too soon to start saving for retirement for any age group, those who fall within the age range of 55-64 are more acutely aware of its importance, as retirement is imminent. As such, age 55 to 64 is a critical period to get a realistic assessment of how financially prepared you are for retirement.
Tutorial: Retirement Planning
1. Assess Whether You're Financially Ready for Retirement
Assessing your financial readiness will help you to determine whether you have a projected shortfall and whether you need to modify your retirement strategies, goals and objectives. To do so, you will need to gather a few things, which include the balances of all of your accounts, your income tax rate, the average rate of return on your savings and information about your current income, as well as the amount of income you project you will need during your retirement period. (To find out how much you'll need to retire, see Determining Your Post-Work Income and Retirement Planning Basics.)
If you participate in a defined-benefit plan, your plan administrator or employer should be able to provide you with your projected income from your pension. (To learn more about defined benefit plans see, The Demise Of The Defined-Benefit Plan.)
The results of a projection can show whether you have a shortage in your retirement savings, depending on how long you plan to spend retirement and your planned retirement lifestyle. If you, find that you are behind with your retirement savings, there is no cause for alarm - yet - it just means that some radical changes must be made to your financial planning. (To read more on this phenomenon, see The Generation Gap and Delay In Saving Raises Payments Later On.)
These changes may include the following:
- Cut back on everyday expenses where possible. For instance, reducing the number of times you eat out, entertain and feed your vices. For instance, if you reduce your expenses by $50 per week (approximately $217 per month) and add that to your monthly savings, it would accumulate to approximately $79,914 over a 20-year-period, assuming a daily compounded interest rate of 4%. If you add the monthly savings to an account for which you are receiving an 8% rate of return, the savings would accumulate to $129,086 after 20 years.
- Get a second job. If you have a skill that could be used to generate income, consider establishing your own business, in addition to continuing with your regular job. If you are able to generate enough income to add $20,000 a year to a retirement plan for your business, the savings could be significant. Over a 10-year period, that would accumulate to approximately $313,000 (or $988,000 over a 20-year period) - assuming an 8% rate of return.
- Increase the amount that you add to your nest egg each year. Adding $10,000 per year to your retirement savings would produce approximately $495,000 over a 20-year period.
- If your employer offers a matching contribution under a salary deferral program, such as a 401(k) plan, try to contribute as much as is necessary to receive the maximum matching contribution.
- Consider whether you will need to modify the lifestyle you planned to live during retirement. This may include living in an area where the cost of living is lower, traveling less than you planned to, selling your home and moving to a house that is less expensive to maintain and/or having a working retirement instead of a full retirement. (To find out how to save money by changing your lifestyle, see Life Planning - More Than Just Money.)
- Revise your budget to weed out some of the nice-to-haves and leave only the must-haves. Of course, a need for one family may be a want for another, but when deciding what to keep, consider your family's true necessities.
It may seem challenging to do without the things that make life more pleasant, but consider the opportunity cost of giving up a little now to help secure the finances for your retirement.
Procrastination Increases Challenges to Saving
Although it is never too late to start saving for retirement, the longer you wait, the harder it becomes to meet your goal. For instance, if your goal is to save $1 million for retirement and you start twenty years before you retire, you will need to save $27,184 each year, assuming a rate of return of 5.5%. If you wait until five years later to start and you plan to retire within 15 years, you will need to save $42,299 per year, assuming the same rate of return. (To find out how long it will take you to become a millionaire, see our Millionaire Calculator.)
2. Re-Assess Your Portfolio
With the possibility of receiving large returns on your investment, the stock market can be attractive, especially if you are starting late. However, along with the possibility of a high return comes the possibility of losing most - if not all - of your initial investment. As such, the closer you get to retirement, the more conservative you will want to be with your investments because there is less time to recuperate losses. Consider, however, that your asset allocation model can include a mixture of investments with varying level of risks- you want to be cautious, but not to the point of losing out on opportunities that could help you to reach your financial goal sooner. Working with a competent financial planner becomes even more important at this stage, as you need to minimize risk and maximize returns more than you would if you had started earlier. (For more on portfolio rebalancing, see Rebalance Your Portfolio To Stay On Track.)
3. Pay Off High Interest Debts
High interest debts can have a negative impact on your ability to save; the amount you pay in interest reduces the amount you have available to save for retirement. Consider whether it makes sense to transfer high interest loan balances, including credit cards, to an account with lower interest rates. If you decide to pay off high interest revolving loan balances, take care not to fall into the trap of recreating outstanding balances under those accounts. This may mean closing those accounts. Before closing accounts, talk to your financial planner to determine whether this could adversely affect your credit rating.
Having your retirement savings on track can provide great satisfaction; however, it is important to continue on that path and increase your savings where you can. Saving more than you are projected to need will help to cover any unexpected expenses. If your savings are behind schedule, don't lose heart. Instead, play catch-up where you can and consider revising the lifestyle you planned to live during retirement.