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Many people are not optimistic about the chances of being able to retire at the traditional age of 65. In one survey, 39% of those surveyed said that they would work past age 70 or never retire.
A more recent study published by the Center for Retirement Research at Boston College paints a more optimistic picture. It concludes that almost half of households can retire at 65 and maintain their standard of living in retirement. For those households whose members can’t afford to retire at 65, 23% would have to work another 1-3 years, and 17% of households would have to work an additional 4-6 years. The study concludes that 88% of households should be able to retire by age 70 and maintain their pre-retirement lifestyle.
Postponing retirement is a powerful way to improve your chances of not outliving your money. Each additional year you work means more savings, more chance for your investments to grow, fewer years to draw down your savings in retirement, and greater Social Security (which increases as you delay claiming it until the age of 70).
While you might not be enthusiastic about the prospect of having to work longer, the reality may not be as bad as you think.
I am asked this question often, which is good because if someone is not saving enough we can make adjustments and get them on the right track. The people I worry about are the ones who don’t ask this question, either of me or of themselves. Maybe they are afraid of what the answer might be or they figure their employer or the custodian of the plan is looking out for them. Well, typically they aren’t.
In 2006, the Pension Protection Act went in to place. This was a nice step towards increased retirement savings, even for the most complacent of employees. This Act allows employers to automatically enroll their employees in the company 401(k) plan. Everyone has the ability to opt out, but they have to request it. Due to human nature, we tend to follow the path of least resistance, so the results were a huge increase in 401(k) plan participation. According to a recent study done by Aon Hewitt Associates, the participation rate in company 401(k) plans is now at 85% compared with 67% for companies who do not have an automatic enrollment program.
So if you are automatically enrolled in to your company’s 401(k) plan, will you have enough money to retire? The answer is: Not likely. You will need to dig a bit deeper in to your personal situation.
The Pension Protection Act I mentioned also allows companies to set an initial default contribution amount. So a company could automatically enroll an employee in their 401(k) plan, designating for example, 3% of that person’s salary for deposit in to the 401(k) plan. This has turned out to be good and bad. The good news is that the complacent employee is participating in the 401(k) plan and automatically contributing 3% of their salary, unless they make the effort to opt out. The bad news is that 3% savings per year of your salary is not likely going to get you through retirement, unless you are expecting to really reduce your standard of living.
Let’s assume our complacent employee is named Larry. Larry makes $50,000 a year and is 35 years old. He plans to retire at age 65. If Larry adds 3% per year to his 401(k) plan (because he just can’t be bothered to opt out or add more), he will have added $45,000 over 30 years (this is before any investment gain).
If Larry made no investment selections for his 401(k) plan (which we know he probably wouldn’t, as he is Lazy Larry), then he would have automatically been invested in the money market. This would amount to about $45,000 in today’s dollars of spending money when he turns 65. Even with some Social Security, that isn’t going to last Larry long. (more…)
If you are like most of us, you likely visit your doctor’s office at least a couple of times a year. But when was the last time you had a check-up for your 401(k)?
It would not surprise me if you said, “not in quite a while”. But getting a financial check-up for your 401(k) account is extremely important, especially given the heightened economic issues and market turbulence over these last few years.
One of the many benefits of being a Merriman client is that we have the tools to help you align your 401(k) investments once a year. All you have to do is provide us with the mutual fund choices within your 401(k).
As the old adage goes, it is best to focus on what you can control. The weather, for instance, is not worth fussing over. In the world of investing, two of the most important things we can control are our budget and how much we contribute to our retirement accounts. Fortunately, both of these items are very closely related. The more you save in your budget, the more you can afford to contribute to your retirement accounts.
We’ve all heard the old song and dance about how skipping your $4 dollar daily latte can have profound impact on your budget. Well, guess what? It’s true. That’s $120/month that could have been better spent. With 7% interest over a 30 year period that adds up to $147,000 dollars!
I don’t want to pester you over your daily decisions; rather I want to point you in the direction of a budgeting tool that will help you identify the “latte” expenditures in your budget.
Have you ever heard the term “stretch IRA”? According to the IRS, there is no such thing. What has become known as a stretch IRA is really a withdrawal strategy geared to spread the tax-deferred status of your IRA assets across multiple generations. Basically this is a provision you can add to any traditional IRA, ROTH, SEP-IRA, or SIMPLE IRA by using a beneficiary designation form.
Typically, a spouse is named as the primary beneficiary of an IRA, with children as the contingent beneficiaries. In this approach, after your death your surviving spouse rolls the balance of your IRA into his or her own IRA. This will allow your spouse to use the money from your IRA to cover his or her living expenses.
Alternatively, if your spouse will not need the assets in your IRA for living expenses in retirement, then you may consider naming your children and/or grandchildren as the primary beneficiaries. This will create the “stretch IRA.” After your death, your beneficiaries would each acquire what’s known as an inherited IRA from which he or she would have to withdraw a required minimum distribution each year thereafter. Here is an example to illustrate:
An article in the Wall Street Journal (Debt Hobbles Older Americans, 9/7/11) paints a sobering picture of the impact that rising debt levels have on people’s retirement plans.
Thirty-nine percent of households headed by people aged 60 through 64 had primary mortgages in 2010, up from 22% in 1994. The median value of mortgage and home loan debt, adjusted for inflation, for homeowners aged 60 to 62 also increased, from about $40,000 in 1994 to $80,000 in 2008.
Housing price declines have made it more difficult to pay off these mortgages, forcing people to work longer before retiring.