Ready for Retirement?

Ready for Retirement

Not many Americans are accumulating the amount of money the experts say they will need to tide them over the remainder of their lives

Saving for retirement is getting harder. Not many Americans are accumulating the amount of money the experts say they will need to tide them over the remainder of their lives, and the U.S. Congress is taking steps that complicate the process further.

The idea is circulating in D.C. that the tax breaks associated with 401(k) savings should be curtailed. As our representatives look for ways to adjust taxes, that idea is still on the table.

Most Americans facing retirement become painfully aware that they will need a substantial amount of savings as well as Social Security payments to get by. The cost of health care is a bug-a-boo for too many as they age and general inflation takes a swath out anything that is set aside for the future. Here are some things to consider:

About half of Americans have a retirement account such as a 401(k) provided by an employer or and Individual Retirement Account (IRA), according to the Federal Reserve.

Not all jobs offer the 402(k) option. Only 35 percent of low-income working households have the job savings plan or anything similar that automatically sets money aside for retirement. For high-income households, the figure is about 80 percent, according to a study by the U.S. Government Accountability Office.

The average savings of most households that have a savings account is $60,000, but there is a wide range on both sides of the average. The typical household headed by someone under 35 had savings of only $12,300 last year, if they had savings at all. The savings cushion ranges from $403,000 at the top to a median of $25,000.

Millennials have more tucked away than their parents did at the same age, Compared with 1989, when a family headed by someone under 35 had just $7,500, today’s family in the same age group has $12,300, after accounting for inflation.

The age at which individuals can qualify for Social Security is rising. Sixty-six is now the threshold for receiving full retirement benefits. The figure is slated to go up slowly until it hits age 67 for those born in 1955.

The average life span is increasing. A woman at 65 can expect, on average, to live another 20.6 years. For men, the figure is 18 years. Retirement income has to last longer for most Americans.

Projections for health care costs are scary. A 65-year-old couple will need some $275,000 to cover medical needs through retirement, according to Fidelity. That doesn’t take into account nursing home or long-term care if necessary.

Fewer companies are offering formal retirement plans for employees. Only 13 percent of private-sector workers were enrolled in such a plan in 2014, says the Employee Benefit Research Institute. In 1979, the figure was about triple that number at 38 percent.

All of these factors suggest a more careful analysis of your prospective retirement income, with adjustments if necessary.

Ways To Maximize Investment Earnings

Investment Earnings

Save early and automatically

It’s a sad statistic. Barely 8 percent of college students who responded to a survey regarding personal finance management could have received an A for doing it right. And in a 2014 survey among adults, only 18 percent showed top grade knowledge in personal finances.

It isn’t all that hard. One financial expert and University of Chicago professor reduced the basic elements to fit onto an index card.

To help, here are seven steps, compiled by Suzanne Woolley, to get you into the groove and keep you there:

First, save early and automatically. Some companies now enroll new hires directly into the company 401(k) so they are saving automatically. Others wait until the employee opts in on his own. If you can, save up to the maximum allowed by the employer so you get the benefit of their declared match. Many companies start to chip in when the employee savings reach 3 percent of their earnings. The benefit is that the money is withdrawn before you get a chance to see it, so you don’t miss it.

If your company does not offer a 401(k), start a savings account elsewhere, but aim for an automatic withdrawal of funds. Even a small amount, faithfully put aside, will grow over time. Try to find an option that offers the best interest. The idea is simply to make saving a habit.

Second, expect financial emergencies. It’s a rare individual who gets through life without one – or more. Almost half of those surveyed in a Federal Reserve analysis said they couldn’t cover a $400 emergency without selling something or borrowing.. However, experts caution that saving for an emergency should not come before saving for retirement. Do what you must to meet both needs, if it means eating Ramen for awhile. The older you are and the higher your salary, the larger your emergency stashes should be. Emergencies such as job loss, which often means the loss of health care coverage as well, are devastating. You should have enough savings tucked away that you could continue meeting expenses for at least six months if at all possible.

Third, set an asset allocation. It’s an investor’s most important decision. A rule of thumb is that your allocation should equal your age. Consider your risk tolerance and then be aware that you won’t really know what it is until it has been tested. The risk tolerance varies from one individual to the next. The market always holds risks, but a bad market, especially when you are already in retirement, can be disastrous.

Fourth, keep fees low. With the current expectation that future stock market returns will be dampened, the drive to keep fees low is greater than ever. If you are using an adviser who receives fees and commissions if you buy the products he or she recommends, your returns are likely to be at least 1 percentage point lower each year, according to the White House Council of Economic Advisers. The council estimated the cost of conflicted advise on IRA assets at about $17 billion per year. Keeping your investments simple and bypassing the advisers may save you money. Warren Buffet, in an annual publication, advised putting 10 percent of your money into short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. The long-term results will likely be better than those attained under the advice of a high-cost manager, he says.

Fifth, if necessary, use an adviser who is a fiduciary. A clip from Last Week Tonight With John Oliver gives succinct advice: “Financial analyst is just a fancy term that doesn’t actually mean anything.” An adviser who gets a commission on an investment you make at his urging may be looking more to his own return than yours. Ask your potential adviser if he or she is fiduciary. If the answer is “no,” run, the clip advises.

Sixth, spend less than you earn. This basic, common sense advice seems unarguable. But some 23 percent of millennials and 19 percent of GenXers ignore it, spending above their earnings. No wonder they have no emergency fund. The end of every pay period is an emergency. Lifestyle creep – the tendency to spend more as we earn more – is a trap too many mid-lifers fall into. Saving really is easier than paying interest on a loan you have been forced into to take care of an emergency.

Seventh, maximize employee benefits. A career isn’t forever. The working years are when you need to build your retirement accounts. Financial Engines conducted a survey that showed only one in four employees had taken full advantage of their company’s 401(k) benefits. The survey was taken among 4.4 million participants at 533 companies. An average loss of $1,336 was experienced by those who failed to contribute the maximum their 401(k) allowed. That’s about 2.4 percent of annual income. Low salaries and budget constraints are the usual excuse given by employees who fail to make full use of the savings option, but even many employees in the upper reaches of the salary scale don’t do it. Most large companies also provide disability insurance as a benefit. If you choose to pay the premium, the tax-free provision could be big. Watch for changes in your employee benefits, such as the addition of flexible spending accounts, a health savings account or a commuter assistance program. Such perks lower the amount of salary on which you have to pay taxes.

Slow And Steady Wins Savings Race

Slow and Steady

Focus on the activity of saving itself, not on the future outcome

When you’re working on a significant financial goal such as buying a house, saving for retirement or trying to get old student loans off your plate, the progress can be discouragingly slow.

Just don’t let it sidetrack you from the ultimate object. Researchers have discovered that the longer you pursue a goal, the farther away the end seems. It’s kind of like being on hold on the telephone. The longer you wait, the more certain you become that you’ll go on waiting forever. Under that scenario, it is easy to cave in and lose sight of the ultimate end toward which you are reaching.

Counterintuitive it may be, but studies show that it is true. And if your final target seems to be receding, you will be better able to talk yourself into taking the money you were going to save and splurge on the new boots that are beckoning.

How to ensure that your end goal stays steady? Set a specific time when it will be achieved, the experts say. Make it as concrete as possible. The more specific you are in your planning, the more likely you are to stick to the details. Work with a financial planner, if necessary, to set deadlines and arrive at the method you will use to achieve your objective.

Then divide the “big picture” into manageable smaller goals. Focus on the activity of saving itself, not on the future outcome. The objective, for instance, should be on setting aside $300 per month for retirement, not on the greater total that you have decided you need for a comfortable retirement.

A study published in Psychological Science concluded that people who break their savings plan down into particular time frames, such as weeks or months, save 78 percent more than those who are focused on some far-off, unforeseeable future goal.

Checking on your progress can help. Say at six-month intervals, compare what you have with what you had. It can be satisfying to see steady progress toward the ultimate goal. If you don’t feel satisfied with the results, make a course correction. Don’t let little hiccups have a greater impact than they should.

Don’t let retirement savings preclude an emergency fund. Having a six-month cushion in the event of an emergency has to take precedence over the future need. Maintain adequate health and disability insurance and make a concerted effort to reach zero credit card debt. Taking care of today makes it easier to ensure financial security in the future.

Saving Shouldn’t Be Hard


When to begin? Now

Too many Americans fail to save enough money to meet emergencies and prepare for retirement. But it isn’t a matter of math, according to personal finance author, radio personality and money guru Dave Ramsey. It’s a matter of priorities. People start saving when future needs become more important than current wants.

The problem is apparent. A Federal Reserve survey found that nearly half of Americans couldn’t cover a $400 emergency without borrowing or selling assets. Most Americans profess a desire to save, but it can’t compete with their immediate desire for a pizza, Ramsey says. Going into debt to fulfill those immediate desires is even worse than taking money that should go into savings to satisfy the craving.

The secret to saving is to make a zero-based budget before a new month begins and then stick with it. That is the best way to know how much you are currently spending and how you can fit savings into the plan. What’s a zero-based budget? It’s what you have when your income compared with your outgo equals zero. In other words, you are assigning every dollar you have to a category.

Start with the necessaries – housing, food, clothing, insurance and bills. Then fill in the rest of the budget, including saving, with the leftovers. Dave offers a budget app, EveryDollar, that will help. You can track transactions on the go, making budgeting easier.

Finding time to work with a budget is a challenge in our society, but a few minutes every month is worth the effort. The budget program saves time by replicating the previous month’s budget as a starting point. Then you just make adjustments for the current month.

Having a concrete copy of your money income and outgo helps you to make decisions. It doesn’t matter how much money you make. It makes a difference how you decided to divvy up what you have. Keep some goals in mind. College, a major purchase (home, car appliances, etc.), a vacation, whatever, all take money and you get that money by putting it aside. Some for emergencies, some for retirement, some for your future plans.

Starting with a zero-based budget, Ramsay says, makes a statement: “I choose to put my future needs before my current wants.” When to begin? Now.

Financial Basics You Should Know As An Adult

Financial Basics

Have a budget and stick with it, and include some savings in that budget

Graduation is a milestone in the understanding of personal finances, as well as the basic underpinnings of the education that will take you through the rest of your life.

Advice from the experts on the basics of personal finances includes these gems:

There is always something new that the advertisers will tell you you can’t do without. Ignore them. You don’t need the “best” phone, computer, etc. etc. Obsolescence is the name of the game today. Find something that satisfies your needs and stick with it. You can pay less for the “not best” and find yourself well provided for.

Don’t get into the mindset that debt is the way to have what you need (or want) unless it is really necessary. Debt is not kind. Consider carefully when you are thinking of getting something new. When you overuse your credit, you are giving up the ability to create a margin for your living. Save up and pay up front for the things you merely want and keep the credit capacity for things that really matter. Watch out for lifestyle creep. It can bury you.

Be reasonable about college costs. If you haven’t saved up enough for a full-blown university, try a community college for the first couple of years. To avoid having to make the choice, begin saving early and consistently for the type of higher education you want. And four years of college is not the answer for everyone. Lesser degrees, such as associate or certificate, can lead to good jobs at less cost. At the very least, a shorter-term education plan might provide the earning capacity to finance more extended college training. Working during the first couple of years so you can stay debt-free will be helpful when you get into the final stretch and borrowing seems inevitable.

Breaking away from home post-high school may be an objective, but it also is very expensive. You may accumulate the sheets and towels, etc., for living away from home, but cash quickly becomes a problem in most cases. If you are looking at rooming with friends or living independently, be sure you have the means to make it work. Have a budget and stick with it, and include some savings in that budget. Even college students have emergencies.

High school graduation is a hallmark, but it can lead to financial stress if you haven’t addressed issues beforehand. Think about it.