Recent research suggests that a full one-third of working Americans have no retirement savings. Another third have saved under $50,000. Thirty percent had saved more but fall far short of being on track to fully funding retirement based on their current lifestyle. Only about 4% were on (or above) track to accumulate enough wealth to allow them to retire with enough money to replace their work income. These are scary statistics and I can think of few things as unappetizing as living the final third of my life struggling financially. With healthcare today and what I suspect will be significant improvements in healthcare in the future, large numbers of us will live well into our nineties and perhaps past age one hundred.
I find, generally, people fall into one of two broad categories:
Group A: “I have plenty of “today” problems…I’ll worry about retirement tomorrow.” Unfortunately, today’s problems tend to morph into a new set of problems tomorrow so getting to retirement planning never seems to come. This defines the 96% who never save enough money.
Group B: “I have plenty of “today” problems…but I’ll add retirement planning to the list and start working on it now!” For the few that have this attitude here are some tips to help speed you along the way:
- Know your number. It’s hard to solve a problem without understanding the magnitude of the problem. How much exactly do you need to accumulate for retirement? Let’s do a quick calculation and example. Start with your net annual income ($50,000). This is the total of net paychecks you deposit in the bank over one year. That’s what you’re spending now so let’s assume you’ll need that in retirement also. Subtract from this number any sources of income you reasonably expect at retirement such as Social Security ($20,000) or a company pension ($0). Divide this number ($50,000 – $20,000 = $30,000) by 0.04 to determine the amount of capital you’ll need to accumulate to replace your earned income during retirement ($30,000 ÷ 0.04 = $750,000). So you’ll need to accumulate three-quarters of a million bucks. You should use this as a quick estimate only. Commit to having a detailed analysis completed with a Certified Financial Planner™ practitioner (CFP.net).
- Track your spending for 30 days. People always tell me they don’t have money left over for savings. To that I say, “Right!” I have never met a person or couple who isn’t wasting a lot of money…spending money impulsively that a week later they can’t even recall! Try this experiment: buy an inexpensive small notebook and write down every penny you spend for thirty days then evaluate your spending. What did you waste money on? Do you see a pattern of misspending such as eating out or buying high cost, low nutritional food items? Could you divert 10% or 20% to retirement savings without dramatically affecting your lifestyle? We often find substantial saving in reducing property & casualty, life and other insurance products costs.
- Save smarter. If your company has a matching 401k plan, be sure to invest enough to capture the match. If not invest in a tax deductible IRA. If you’re in a low income tax bracket, invest in a Roth IRA. Two easy ways to increase your savings is to commit one-half of all raises or bonuses to your retirement savings program. You can also raise cash and de-clutter by selling your junk (rarely used clothes, garage and household items). As my partner, Hugh Smith, CPA, CFA, likes to say, “Always pay yourself first!”
- Invest smarter. Let’s face it, rates of return of fixed income investments (money market accounts, CDs and bonds) will not get you where you have to go. Be willing to be a long-term investor in the stock market. Yes, in the short term it will be very volatile but long term returns have exceeded 7% or more annually. You’ll need a majority of your money invested in the stock market.
You may have a better idea for retirement saving. If so, do that! If not, start here but please don’t wait until tomorrow!