Savings For Retirement – Your No-Panic Guide For Those Late to the Game
Different stages of life have their unique challenges and distractions when saving for retirement.
The typical issues for those most investors in their 40’s are:
- Dealing with competing interests, which are most typically saving for retirement and children’s education.
- Creating a unified and coordinated strategy for meeting these goals simultaneously.
Don’t let yourself get distracted and/or overwhelmed, let’s walk through what you need to know.
Retirement Strategies for 40-something investors:
The lynchpin is creating a detailed financial plan that will quantify where you currently are in relationship to your goals (how much you have saved presently vs. how much you need to retire) and what needs to be done to get there (to meet that goal, you must save XX per month.) If the savings rate(s) are necessary to reach your goals are not realistic today, a plan of action for building to that rate needs to be created, or the goals need to be reevaluated.
Some common themes across prioritizing your goals or your next steps are:
- creating an emergency fund (or cash reserves)
- addressing debt issues
- capturing ‘free money’ from 401(k) matching
- incorporating Roth IRAs &/or after-tax savings as appropriate
How to get started saving for retirement when it’s already late in the game:
In almost every situation there is the opportunity for some level of saving for retirement (no matter how small) and the most important thing is to start the habit of regularly investing. The decision to forgo that investment typically revolves around the concept that saving money is not fun; however, the actions required to make up for the missed opportunity are not fun either. Notably, taking on more risk than you might otherwise be comfortable with, more drastically cutting your current cost of living or delaying your retirement in an attempt to catch up.
Creative ways for people to start saving if you work in an office:
The most critical decision to make is to be confident that you are capturing all of the ‘free-money’ provided by an employer’s matching. Matched contributions will typically provide a return that cannot be matched by the stock market; for example, 25%, 50% or 100% match on each dollar you save up to the stated limit. Beyond that, you can evaluate if your company’s retirement plan is the most appropriate vehicle for you use.
Creative ways for people to save if they work for themselves or a small employer:
If you own your own company and have good cash-flow, there are numerous strategies to save for retirement that can be utilized to tilt the number of company dollars allocated to your account. The specifics of your situation will dictate what is available to you, but things like your age and income relative to the rest of the company will be factors.
Potential problems to consider:
In addition to overcompensating for the late start by loading up on risk, you can become your own biggest problem by not facing the reality of your situation or, as noted above, rationalizing why you don’t have the magnitude of an issue that you do. A primary benefit of an independent advisor is genuinely holding you accountable to the reality of your situation and can be an invaluable tool.
What types of tax-deferred, non-tax deferred accounts are useful?
Depending on current income levels relative to anticipated future income levels, Roth accounts (IRAs or 401(k)s) can be extremely attractive. If it makes sense to give up the upfront tax savings of a traditional IRA or 401(k), the long-term tax benefits are significant. At this point, most 401(k) plans will offer a Roth option.
Dealing with youthful indiscretions:
Learn from your past mistakes and applying/adapting those lessons to your current set of circumstance. For example, allocating an excessive portion of disposable income in your 20’s to clothing (or something that does not create long-term value for you) can be applied to the amount you plan to allocate towards a new automobile if you desire luxury models versus practical transportation.
Relying on generic retirement calculators:
Rules of thumb can be dangerous things, and the results of online calculators are only as good as the quality of the inputs. When considering your plan for saving for retirement, paying an independent advisor for their expertise in setting realistic assumptions/parameters is the best method. Overlooking critical data points, concepts, or themes can be disastrous. Utilizing unrealistic assumptions for things like rate of return, inflation or taxation will lead to erroneous results that may provide a false sense of security.