Retirement Planning

5 Steps to Catch Up on Retirement Savings

It happens all too often. When you start out in the working world, you are focused on just getting by. You have bills to pay, and perhaps student loan debt to pay off too. A few years later, maybe you get married, buy a house, and start a family. And before you know it, you hit your 50’s and realize that retirement is not that far off. Then you start to wonder if you have enough saved for retirement. You are certainly not alone if you feel you could be more prepared for a financially comfortable retirement.

The role time plays in your retirement savings

The reason time has such an impact on reaching retirement savings goals stems from the basic fact that there are two elements to your retirement plan: your contributions and what your contributions earn through investments (compounding). When you invest, the money generates investment earnings, and those earnings generate more earnings as time goes on, and so on. To really get your money working for you, you need to give it time to earn those investment gains. In short, the less time your money has to compound, the more money you must contribute to reach a certain goal.

If you are concerned that you don’t have enough saved for retirement, here are five actions you can take now to get your retirement plan on track.

1. Increase your retirement plan contribution
Increasing the amount you contribute to a qualified retirement plan, such as a 401(k), is the surest way to increase your retirement account. Many people defer only the amount necessary to get the maximum employer match contribution, but you shouldn’t stop there, especially if you’re trying to catch up on lost saving time.

You can contribute up to $19,500 (in the year 2020) to your 401(k), and if you are over age of 50, or if you turn 50 this year, you can contribute an additional $6,500. This is known as a “catch-up contribution.”

2. Review your current financial situation
Taking a comprehensive look at your current financial situation, including all your recurring expenses and debt, can give you an idea of how much money you may need in retirement to maintain your lifestyle. Identifying this will help you understand how much more you must save before you may comfortably retire.

Reviewing your financial situation can also help you identify expenses you can trim. Any trimming you make frees up more funds to contribute toward your retirement plan.

Keep in mind, it’s important to make eliminating debt – especially high-interest credit card debt – a priority before retirement so you don’t have to worry about it during retirement. Once you’ve paid off your loans, take what you would normally pay to your creditors and add it to your retirement savings contribution.

3. Build an emergency fund
It’s important to build up an emergency fund so you’re not tempted to dig into your retirement savings early if you experience an emergency expense. Taking early withdrawals from a qualified retirement plan can come with a financial penalty, in addition to hindering you from reaching your goals.

4. Review where and how your retirement account is invested
As you get closer to retirement, you may become a more conservative investor, opting to safeguard your savings by investing more heavily in lower-risk investments like bonds rather than higher-risk investments like stocks. However, if your contributions have had less time to grow on their own, you may want to continue investing more aggressively to potentially earn higher investment returns. Evaluating how much you have saved so far, how much time you have left to save, as well as your personal risk tolerance will help you decide the proper asset allocation for your portfolio.

5. Consider meeting with a financial advisor
If you’d like more support and guidance while making changes to your retirement savings approach, or simply want to make sure you’re on the right track, consider meeting with a financial advisor. An advisor will take a comprehensive look at your entire financial situation and create a personalized plan for your unique situation.

No one knows for sure if they’ve saved enough for retirement, until they’ve reached retirement of course. We can’t predict every expense we may have or the amount of taxes we’ll be required to pay. But there’s no need to panic, as it’s never too late to correct your retirement savings and get back on track so that you’re prepared for whatever awaits you in retirement!

Benefits of Saving Early for Retirement

It’s never too early to start saving. This applies to a lot of things – Saving for college, saving for your emergency fund or saving for a home. It’s especially important to start saving early for retirement.

Why? Because of the benefits of compounding interest.

Compounding means your contributions earn interest on the initial amount invested, and on the interest you accumulate over time. So, the earlier you start investing in your retirement plan, the more potential for investment earnings.

Consider this: Kim starts saving for retirement when she’s 25. She saves $3,000 a year for 10 years and then stops contributing. Kim’s total investment is $30,000. Jill starts saving when she’s 35.  She puts $3,000 each year for 30 years into her 401(k). Her total investment is $90,000.

If we assume an 8% rate of return, Kim’s account balance when she’s 65 would be $472,000.  Jill’s account balance at age 65 would be $367,000. Even though Kim contributed less and for a shorter period of time, her account balance at retirement is over $100,000 more than Jill’s.

Kim’s gains are the result of the earnings on the earnings from her original investment.

What if Kim didn’t stop contributing after 10 years? If she kept saving at the same rate, her account balance at age 65 would have grown to over $839,000!

No matter how many years you have until you retire, make sure you’re saving now. Even a little bit each month can go a long way!

Managing Investment Risk When Nearing Retirement

If you’re nearing retirement or are currently retired, it’s more important than ever to carefully choose how to allocate your investments to balance risk and reward.

It is possible to save for decades to build a “nest egg” only to have it significantly eroded in a short period of time and completely change your financial possibilities in retirement. There are two examples over the last 20 years that highlight that risk. Between March of 2000 and October of 2002, the S&P 500 declined by over 37 percent. From October 2007 through February 2009, the S&P 500 declined by more than 49 percent. Your asset base would have been further eroded had you been taking withdrawals during those periods. After a loss of 50 percent, an investor would have to have the same investment earning 100 percent just to get even.

Unlike younger investors who have time to recover from a big loss, individuals nearing retirement could potentially be forced to postpone their planned retirement date if they experience the same serious loss of retirement security. Therefore, it’s important to select the right advisor who can analyze your current situation and make quality recommendations.

Portfolio Analysis and Recommendations

A quality advisor will look at three things when analyzing and making recommendations to a customer’s portfolio.

• Financial Situation: Any analysis must start with understanding the client’s personal financial situation. What is their net worth and sources of income? What types of assets does the customer currently own? What does the ideal retirement look like to the client and can their investments provide enough income to reach that goal?
• Risk Tolerance and Investment Experience: An advisor must take the time to really understand the risk tolerance of any customer. There are risks to assets that have historically provided higher rates of return, but also have risks of significant short term losses. Other lower risk assets can provide stability, but are limited in their ability for growth and keeping up with inflation. The role of the advisor is to educate the customer on their options so together the customer and advisor can come up with the right allocation.
• Market Knowledge: Every customer should expect their advisor to provide well thought out guidance regarding current market conditions. This includes interest rate policy, tax policy, economic conditions, equity market conditions and any relevant geo-political factors. For example, the current trade dispute between the United States and China could have significant implications for the world economy, world equity markets and possibly the interest rate policy of the United States Federal Reserve.

When you’re within 10 years of your target retirement age or are living in retirement, it is critical that your portfolio be properly allocated so your investment portfolio can sustain you through retirement.

Other Factors to Consider

While one of the biggest factors to consider when investing for retirement is your time horizon – how long you have until you will rely on the invested assets and returns – there are other important factors to consider when deciding how much risk to take.

Some important factors to consider when deciding on an investment plan:

• Health Care Costs: A number of studies have estimated that a couple at age 65 will need to pay more than $250,000 out of pocket over their expected lifetime to cover medical expenses. That number could rapidly rise if there arises a need for a care facility over a number of years.
• Income Stability: Often, retirees depend on a pension from their employer. In many cases, if the employee passes away, the spouse’s benefit may be reduced or eliminated altogether. Income from farmland or real estate investments could decline during times of economic difficulty. It is always important to understand your source of income and have a plan in place for a possible change in your income stream.
• Costs and Fees: There will always be costs and fees when working with an advisor. It is important that those fees are transparent and you feel you are getting value out your relationship with your advisor.

Every investment portfolio is unique and should be tailored to the investor’s needs, goals and situation. It’s important you work with an investment advisor who understands market conditions as well as your unique situation to present the option that best works for you.

4 Things to Know About Your 401(K)

Planning for retirement is tricky. It seems like we can always find 100 other things to spend our hard-earned money on. But saving for retirement is a crucial part of your overall financial wellness and can help to maintain your standard of living during your retirement years. So, the question is, what’s the best way for you to start saving for your retirement today? The answer is taking advantage of your employer’s 401(k) plan.

What is a 401(k)?

A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck. Often, the employer will also offer to match a percentage of the employee’s contribution and/or make an contribution on behalf of the employee. The plan may offer Traditional pre-tax contributions or Roth after-tax contributions. Learn more about the differences between a 401(k) or Roth 401(k).

What benefits does a Traditional 401(k) offer?

A 401(k) retirement savings plan offers unique benefits over a traditional savings account:

• Traditional contributions are made on a pre-tax basis, reducing your current taxable income
• The earnings on your contributions grow tax-deferred. You don’t pay tax until you take a lump sum distribution
• Your employer may match a portion of your contribution, increasing your overall savings

A 401(k) allows you to set aside money specifically for retirement. So when you are ready to retire, the account is used to supplement your retirement income.

How do you maximize the benefits of a 401(k)?

To make the most of your 401(k), you need to take advantage of your employer’s match offering. Ask your HR representative or employee benefits administrator how much your company will match. The amount of the match can vary widely by company. Regardless, your employer’s match is free money to you, so set a goal to defer as much as you are able, but at least enough to get the full match – or work toward that amount.

There are also limits on the maximum contribution you can make to your 401(k). If you can meet the maximum contribution with your current financial position, consider doing it each year. Maxing out the contribution amount is one way to ensure you are creating a comfortable retirement savings. But if your current financial situation doesn’t allow you to contribute the maximum amount, ensure you are at least meeting the minimum for your employer’s matching to kick in.

What if you move jobs?

Keep it tax deferred! You’ve worked so hard to save for your retirement, so if you haven’t yet reached normal retirement age, you have options to keep it tax deferred and avoid taxes and/or penalties for early distribution. You have options:

1. You may be able to leave it in your former employer’s plan
2. If your new employer offers a qualified retirement plan which accepts rollovers, you can roll it into that plan
3. You can roll it into an Individual Retirement Account (IRA)

What's the Difference Between a 401(K) and a Roth 401(K)?

Hypothetical: Let’s say you begin a new job (Congratulations!) and it’s your first day in the workplace. After the office tour, you’re probably going through the process of enrolling for employee benefits with the Human Resources representative. Scanning the retirement benefits form, you suddenly stop when you make it to the 401(k) contribution section, confused by your two options: Traditional 401(k) and Roth 401(k). What’s the difference? What to do next?

Traditional 401(k)

Traditional 401(k) contributions have been around since the 401(k) plan was created: you the employee specify a fixed percentage (%) or dollar amount ($) that is deducted from your paycheck and deposited to a retirement account created for you by your employer. Then the funds are invested in stocks and bonds for future growth to fund your retirement. Traditional 401(k) contributions are made on a pre-tax basis, which simply means that income taxes are not withheld on those amounts set aside for retirement. Instead, you pay income taxes when you take a distribution payment from the Traditional 401(k) when you are retired.

Roth 401(k)

Roth 401(k) contributions are a relatively new concept – you the employee still specify a fixed percentage (%) or dollar amount ($) that is deducted from your paycheck and deposited to your employer-sponsored retirement account, but the key difference is that Roth 401(k) contributions are made on an after-tax basis. This means that taxes are withheld on the amounts you set aside for retirement, and the net amount after withholding is invested for future growth. When it comes time to take a distribution payment from the Roth 401(k) when you are retired, no income tax is due – it was already paid when you set the money aside earlier.

Choosing the Best Option for You

Now that you understand the difference, which one should you choose? It depends on income tax rates – if one expects income tax rates to increase in the future, a Roth 401(k) contribution makes sense (better to pay the lower income tax rate today and avoid the higher income tax rate in the future when you are retired and begin taking distributions). On the flip side, if one expects income tax rates to decrease in the future, a Traditional 401(k) contribution is preferable (better to avoid paying today’s high income tax rates and instead pay a lower rate in the future when you begin taking distributions in retirement).

Without a crystal ball, it is difficult to know what will happen with income tax policy – that’s up to Congress. You might consider hedging your bets and making both Traditional 401(k) and Roth 401(k) contributions. Let’s say you’ve decided to contribute 10% of your wages to the 401(k) – you could split it 5% Traditional 401(k) and 5% Roth 401(k) if the plan allows. Be sure to consult with your accountant/tax preparer, a wealth advisor and your Human Resources representative for the details.

Investing In An IRA: When, Why And How Much

NOTE: This article was last updated on February 15, 2019, to include provisions of the SECURE Act passed into law December 20, 2019. 

Individual Retirement Arrangements, or IRAs, are common retirement plans. Traditionally, IRAs aren’t funded by employers, which makes the plan appealing to individuals without employee-sponsored plans or are self-employed. Investing in IRAs is common among individuals with employer-sponsored plans seeking additional retirement savings.

It’s important to know when and how much to invest in order to get the most out of your plan. Consider what time of year is best for you to invest in your IRA, how much you can contribute to maximize your return on investment, or ROI, the differences between a Traditional and Roth IRA, and the benefits.

When and how much should you invest in an IRA?

Financial experts have varying viewpoints on when and how much to invest. For some, they’ll suggest early January with the belief prices are lower during the beginning of the year, providing a greater chance at investing before stock appreciation. Investing early in the year also means your contribution will have the maximum time to gain returns and grow. Therefore, investing the maximum amount, which is $6,000 (or $7,000 for individuals over 50) at the start of the year, often means you get the most out of your investment.

However, if investing $6,000 within the first few weeks of the year isn’t possible, or you’re a risk adverse client, dollar cost averaging, or DCA, allows you to make contributions throughout the year. For the budget conscious, DCA allows individuals to plan consistent monthly contributions and increases the opportunity to invest during unexpected market declines.

What’s the difference between a Traditional IRA and Roth IRA?

When opening an IRA, you have two options: a Traditional IRA and a Roth IRA. Here’s a breakdown of their differences and similarities.

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What are the benefits of investing in an IRA?

In addition to the tax treatments each provides tangible benefits, such as first-time-home-buyer, qualified education or hardship withdrawal expenses. Typically, IRAs are less restrictive than other retirement plan options, such as 401(k)s. This means you can choose from a variety of providers and investment options, whereas 401(k)s are often limited to employer provided options.

With multiple options within your IRA, it’s important to understand the basics of asset allocation in order to build a balanced investment portfolio. It’s also important to have an idea of how much income you will need in retirement and how long your retirement savings will last. Be sure to check out our retirement financial calculators to find answers to both of these questions.

NOTE:

Since the publishing of this article, the SECURE Act was signed into law on December 20, 2019 which includes a change to the timing of RMDs for those who have not yet attained age 70 ½ or who have not yet commenced RMDs.    

Effective for distributions required to be made after December 31, 2019, the Required Beginning Date for Required Minimum Distribution, for non-5% company owners, is April 1 following the later of the calendar year in which the employee attains age 72 or retires. For an employee who is a 5% owner, the Required Beginning Date is April 1 following the calendar year in which the employee attains age 72, even if the employee continues to work past age 72. 

If a participant dies before the Required Beginning Date and the spouse is the participant’s beneficiary, the spouse will be able to delay distributions until December 31 of the year in which the decedent would have attained age 72.