Saving for retirement 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 range of 55-64 years are more acutely aware of its importance, as retirement is imminent. As such, this stretch represents a critical period in which to get a realistic assessment of how financially prepared you are for retirement.
"For those who are 55-to-64-years old and wondering if they’re retirement-ready, if they've saved enough, etc., it's best to seek professional help from a fiduciary who specializes in retirement – especially if it feels too overwhelming. There are so many variables to consider when planning retirement that if you forget a major piece – healthcare costs, nursing-home care, loss of a good-paying job during prime earning years, etc. – your retirement plans could be drastically altered," says Martin A. Federici, Jr., AAMS®, CEO of MF Advisers, Inc., Dallas, Pa.
1. Assess Whether You're Ready
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 savings and checking 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 retirement. (To find out how much you'll need to retire, see Retirement Planning Basics.)
"If you are within 10 years of retirement, the numbers pretty much are what they are, but knowing is essential to making critical decisions on things like debt, Social Security and how much income to expect from your retirement savings. Don't expect everything to work out fine if you have not done any retirement planning; that's like trying to get somewhere without a map or any directions," says Robert R. Schulz, CFP®, president of Schulz Wealth in Mansfield, Tex.
The results of a projection can show whether you have a shortage in your retirement savings, depending on how soon you plan to retire and the lifestyle you hope to pursue. 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.
These changes may include the following:
– Cut back on everyday expenses where possible. Reduce 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. "Not everyone has to be an Uber driver. Your own commute is tiring enough. Perhaps you can be a freelance copy editor or writer. You may be able to [offer] private lessons, such as music, language, math or science," says Marguerita Cheng, CFP®, RICP®, CEO, Blue Ocean Global Wealth, Gaithersburg, Md. 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.
– Increase your retirement contributions. If your employer offers a matching contribution under a salary deferral program, such as a 401(k) plan, a 403(b) or 457 plan, try to contribute as much as is necessary to receive the maximum match. Don't forget that those over 50 can make an additional catch-up contribution of up to $6,000, in addition to the regular $18,500, in 2018.
— Consider whether you will need to modify your retirement lifestyle. 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: It's About More Than 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. 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 a solid financial footing for your retirement.
2. Re-Assess Your Portfolio
Offering the possibility of receiving large returns on investments, 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 principal. 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 recover losses. Consider, however, that your asset allocation model can include a mixture of investments with varying level of risk – you want to be cautious, but not to the point of losing out on opportunities that could help you to reach your financial goals sooner.
Even if you've been investing for years, the asset allocation of your retirement nest egg should be reassessed periodically. 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.)
"Approaching retirement can put people at risk if they don’t pay attention to their portfolio. With less time to recover from major market corrections, it is extremely important to understand the investment philosophy and strategy you are implementing. If your advisor doesn’t have the experience or ability to identify warning signals in the market, you may end up with large losses without the necessary time to ride out the storm. Investors need to know that there are investment managers with tactical models designed to hold larger cash positions during market turmoil and not just ride it out," says Dan Timotic, CFA, managing principal, T2 Asset Management, LLC, Oakbrook Terrace, Ill.
3. Pay Off High-Interest Debts
High-interest debt can have a negative impact on your ability to save; the amount you pay in interest reduces the amount available for retirement. Consider whether it makes sense to transfer high-interest loan balances, including credit cards, to an account with lower interest rates. I
"If you have credit cards with high interest rates, you could get yourself into trouble as you approach retirement. The best way to deal with this is to pay off your unproductive debts such as credit cards and other unsecured lines of credit," says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass.
f you decide to pay off high-interest revolving loan balances, take care not to fall into the trap of buildng up new debt once the account is free and clear. This may mean closing those credit card accounts; but before you do, talk to your financial planner to determine whether this could adversely affect your credit rating. If you have the discipline, you may do better locking those cards in a drawer and using them only for a small purchase a couple of times a year to keep them active.
"Ideally, entering retirement debt free will give you a better chance of making work optional and leisure affordable. Remember, it can’t be too early to start planning your career exit strategy and new life chapter. The more prepared you are, the more likely you will succeed and enjoy this stage of life," says Therese R. Nicklas, CFP®, CMC®, Wealth Coach for Women, Inc., Rockland, Mass.
The Bottom Line
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 want to save $1 million for retirement and you start 20 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.)
Having your retirement savings on track can provide great satisfaction. All the same, 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 have once you bid the office goodbye.