Bill Haber / AP file
Retirees of the future will find their experience much different from their parents' golden years.
Once people reach their 50s they finally see retirement on the horizon. They start envisioning that time when they can stop going to work and instead spend their days on the golf course, on the beach or with their families. Yet many people have not saved nearly enough for retirement by the time they are 50 years old. A recent survey by the Employee Benefit Research Institute found that 60 percent of workers born between 1946 and 1964 have less than $100,000 for retirement. In fact, 40 percent have saved less than $25,000.
24/7 Wall St. interviewed retirement-related experts from brokerage firms, banks, retirement advocacy groups, and independent financial advisers. With their help, 24/7 identified the eight actions you should take if you have not prepared to retire.
Financial advisers generally recommend people begin saving for retirement starting in their 20s to take full advantage of compounding interest. Although the financial advisers who spoke to 24/7 Wall St. say it is very hard to give concrete estimates on how much should be allocated toward equities and fixed-income, they say it is best to cut risk as one approaches their target retirement age.
Not saving up enough for retirement used to be less of a problem. Workers in previous generations often received pensions from their employers, allowing retirees to know exactly how much money they would get once retired. But employers have increasingly shifted that responsibility onto the employees through 401k and other defined contribution plans.
These days, notes Joe Ready, executive vice president for retirement at Wells Fargo, people get married and have children later in life than previous generations. This means that it is increasingly hard to save for retirement during the 40s and 50s because they still face heavy financial obligations -- they are still paying off their mortgage, sending their children to college and so on.
The fact that many current retirees are living off pensions has conditioned younger generations to think their retirement might be the same, says Lule Demmissie, managing director of retirement for TD Ameritrade. “Face it,” Demmissie says, “your retirement isn’t your parents’ retirement.”
Demmissie notes that people in retirement today are working until a later age and finding cheaper housing as they no longer can count on that pension that was once provided to employees. She also points out that while many people have never saved enough for retirement, the problem has become worse once the financial crisis took hold.
By the time you reach age 50, you should have roughly four times your annual income built up in retirement, according to Jean Setzfand, vice president for financial security for AARP. The best way to reach that goal is to start socking away money starting in your 20s. Still, if you are well behind on your goals by the time you reach your 50s, all hope is not lost.
These are the eight things to do if you have not planned for retirement.
1. Reassess life priorities
Part of reassessing priorities is ensuring you have a plan in place. People should have a retirement plan when they are significantly younger than 50, yet EBRI finds that only 42 percent of workers of all ages have a retirement plan.
If, at the age of 50, people find themselves inadequately prepared for their dream retirement, they should start by looking at the future, advises Setzfand. “The first thing people should do is consider, ‘What do I want to do with the rest of my life?’” The answer to that question will help decide what actions need to be taken, Setzfand explains. Before moving forward, it is important to ask such questions as “Do I really need that second house in Florida?” or “Can I (afford to) start a trust fund for my grandkids?”
People need to consider how much they are willing and able to fund their children's college education. Setzfand notes that many parents in their 50s will foot most or all of their children’s college bill to make sure their children don’t end up with debt early in life. However, she cautions people to be careful to make sure they have enough money to build and sustain their own retirement nest egg. After all, you can’t borrow to fund your golden years.
2. Take advantage of increased contribution limits
If you are late saving for retirement, you may need an extra boost to get closer to your goals. Once people reach age 50, the amount of money they can contribute annually to their 401k and their IRA increases from $17,000 to $22,500 and from $5,000 to $6,000, respectively. Employees should take advantage of these higher contribution limits if possible, since contributions to these plans are tax deductible.
Plus, many employers match contributions up to a certain amount, meaning that employees are forgoing free money if they do not contribute the maximum contribution amount. “If you have access to a 401k, jump into it with two feet,” Ready says.
Advisers also recommend downsizing. While the level of downsizing for some could mean simply cutting down on small expenses such as eating out and shopping, for others, more drastic measures may be necessary.
“Downsizing often isn’t something that can be done on the peripheral,” Demmissie says. For some, it may even mean downsizing the house, especially if there is a lot of equity on the property.
Those eyeing retirement can even plan to move in with their adult children. Demmissie notes there has been an increase in multiple generations living under one roof. While living with children is not necessarily part of most people’s dream retirement, it can help make sure retirees do not outlive their money by cutting out housing costs and even some home-care costs. Moving to places with lower tax rates and costs of living, Demmissie notes, may also help people live their more ideal retirement at a lower cost.
4. Keep working
With people living longer than generations past, the traditional retirement age of 65 is generally increasing and will continue to do so. About 40 percent of current American employees plan to continue working until at least age 70, according to a 2011 study by the Transamerica Center for Retirement Studies.
Working until a later age, whether full-time or part-time, gives people more time to build their nest egg while also reducing the likelihood that they will run out of money during their golden years. Plus, if someone truly enjoys his or her job, continuing to work in some capacity is not necessarily a bad thing. “I always believed retirement was fictional,” says John Sestina, founder of John E. Sestina and Company in Columbus, Ohio. “Why does someone have to quit working if they are productive, and what are they going to do to replace that in their life? You can only play so many rounds of golf.”
People still need to take into consideration that their employment status could change due to circumstances such as a layoff or deteriorating health, says George Middleton, an adviser with Limoges Investment Management in Portland, Ore. “A lot of my clients say they will just keep working,” he says. “I always tell them ‘but what if you can’t?’”
5. Factor in health care costs
Another burden facing retirees in the relatively near future is rapidly growing health care costs. A 65-year old couple who retires in 2012 should plan for $240,000 for medical costs, according to a study by Fidelity, provided the couple does not receive employer-sponsored health coverage. This figure, on average, has risen 6 percent annually since 2002.
Diane Pearson, a financial adviser at Legend Financial Advisors in Pittsburgh, says higher health care costs in recent years have changed the way she has counseled clients on retirement. She used to try to get her clients’ nest eggs to accrue 2 percent more than inflation each year, but now that number is close to 6 percent due to rising health costs.
“People generally underestimate the amount of money they’ll need in retirement,” Pearson says, noting that health care predictions play a major role in that underestimation. “The rule of thumb has been spending 75 percent to 85 percent in retirement of what you were spending while you were working full-time. I think that’s absolutely false.” Pearson says the amount spent in retirement likely will be about the same spent in your working years.
6. Don’t play catch up
If someone has failed to save enough for retirement by their 50s, it may be tempting to build a portfolio full of stocks to play catch-up. The financial experts interviewed by 24/7 Wall St. generally advise against this move. While some stocks are still important in a portfolio to help manage inflation, a bad stretch in the stock market can completely devastate a person’s financial goals. “That’s financial suicide,” Sestina calls such a move. “They can’t afford the risk with so little time.”
Middleton says he counsels his clients to take on as little risk as possible in order to reach their retirement goals. Someone who has not saved anything for retirement by age 50 would need to take more, but not excessively more, risk than someone who saved since they were in their 20s. “I just warn (clients) that the plan might not work,” Middleton says.
7. Beware of financial scams
When people have not saved enough for retirement, they feel overwhelmed and are willing to take drastic measures to try to reach their retirement goals, including falling for financial scams such as the “get rich quick” and “work from home” schemes. Those ages 60 and older lost at least $2.9 billion due to these scams in 2010, according to a recent joint study from Metlife Mature Market Institute, the National Committee for Prevention of Elder Abuse and Virginia Tech University.
Setzfand says that when people are approached about financial products, they need to do research to make sure the product really can help achieve their financial goals. She also recommends people do some research on the broker trying to sell the product to make sure no sanctions have been levied on the broker. “If something looks too good to be true, it’s too good to be true,” Setzfand says.
8. Do not skimp on insurance
While socking a higher portion of your income in your 50s may help build up a dream retirement fund, it is important to keep up with insurance payments in order to prepare for the unexpected. Such plans as life insurance and long-term care insurance can ensure a person’s spouse or children aren’t financially devastated in case of unfortunate events.
Since life insurance is relatively affordable, Middleton says he has not noticed many people going without it. However, he is concerned many are forgoing long-term care insurance due to its high cost. Middleton says not having long-term care insurance can “completely destroy an estate” if a spouse happens to need that level of care in the future.