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Nearly 50% of households have nothing saved for retirement, according to the Economic Policy Institute. The median retirement account for 50-55 year olds is $8000 and is $17000 for 56-61 year olds.
These are not encouraging statistics. A common rule of thumb, within the personal finance community, is to have 10 times your annual income saved for retirement. If you earn $50,000 annually, that means you should have $500,000 saved in your retirement account.
“According to the Fidelity Retiree Health Care Cost Estimate,2 an average retired couple age 65 in 2019 may need approximately $285,000 saved (after tax) to cover health care expenses in retirement.”
The median household income in America is $57,652 (2017), which means the average retirement savings a household needs is close to $580,000 by the time retirement rolls around. The average retired couple spends $285,000 in healthcare costs. If you have $580,000 available by retirement, it leaves $295,000 after healthcare costs. That amount doesn’t allow for many splurges on fancy vacations or a dream purchase you’ve always had.
You should be able to have fun and enjoy the fruits of your labor in retirement.
So how can we catch up on our retirement savings to be able to live comfortably and have a little left for fun?
1. Maximize your contribution to your 401k at work
If you are over 50 and have access to a 401k plan at work, you can contribute up to $25,000 per year in 2019. The cap for those under 50 is $19,000 per year in 2019.
Many employers match a percentage of what you contribute to your 401k – the amount generally falls between 50-100%. If this is the case for you, you may end up with an annual contribution of $37,500 – $50,000 per year if you max out your contribution after your 50th birthday.
People who don’t have access to a 401k can use an IRA (Individual Retirement Account) instead. The maximum contribution to an IRA for people over 50 is $7,000 ($6,000 for people under 50).
Both 401k and IRA’s offer the benefit of lowering your overall tax burden because the contributions are taken out pre-tax (lowering your taxable income). The money in your 401k or IRA will compound on a tax-deferred basis. You will be taxed on the back end when you start withdrawing money in retirement (after 59 1/2).
The other option is to contribute to a Roth IRA, where your contributions are made after you’re taxed. All the money you earn from compound interest will not be taxed when withdrawn after 59 1/2.
Having a Roth IRA gives you the advantage of having non-taxed income in retirement.
Contribute to both a 401k and Roth IRA (if you qualify) to allow yourself financial flexibility in retirement.
2. Eliminate bad debt – credit cards, student loan debt, auto loans, mortgage
If you want to truly enjoy retirement, eliminate bad high-interest credit. That means get rid of any debt that is not paying you back.
Make it a priority to pay down your mortgage early. If you have a 30-year mortgage, pay extra money (on top of your minimum monthly payment) every month towards the principal. Use your tax refund (if you’re lucky) to pay down the principal on your mortgage. The principal of compounding applies to mortgages also, but the advantage goes to the mortgage holder. Contribute additional money towards your principal early and often because your first 10 years of payments go mostly towards interest on your 30-year loan.
Pay down your student loan debt. This is actually more important than paying down your mortgage. Your student loan debt follows you wherever you go. In perpetuity. You still end up owing on your student loans, even, if you declare bankruptcy.
The companies that handle federal student loan debt are notoriously predatory (watch the John Oliver special on it). You’ll want to get out of their pocket sooner rather than later.
Again, if you get a tax refund, spend it towards the principal on your student loans.
Same goes for Credit card debt and Auto loans.
3. Work as long as possible
This sucks to hear, but you may have to work longer if you didn’t start investing for your retirement early enough. This allows you to stretch out the span of time that you contribute to your retirement fund.
In order to do so, you need to take good care of yourself. Stay physically fit, eat well, and take care of your mind. This way you increase your chances of living longer and lower your chance of developing a chronic health condition that won’t allow you to enjoy retirement.
I hear too many stories of people getting sick or developing a chronic condition after they retire. It scares and motivates me to be better to myself. What’s the point of all of this hard work and time spent earning, saving, and investing if you can’t enjoy it?
4. Delay Withdrawing your Social Security Benefits
“You are eligible for full retirement benefits at your full retirement age (FRA), which varies by your birth year. For people born between 1943 and 1954, it’s 66. It rises slowly by month for folks whose birth years are between 1955 and 1959 and is 67 for everyone born in 1960 or after.
If you retire earlier than your FRA, your benefits are lower than they would be at FRA, and they stay at that rate for the duration of your retirement.
Ah, but you receive higher benefits if you delay beyond your FRA. Benefits rise approximately 8% for every year after your FRA you don’t take them, until age 70. There is no increase possible after that age, so your rate will stay the same forever.
So, if your FRA is 66 and you delay your Social Security checks until age 70, you could enjoy 32% more in benefits than at your FRA.”
Start investing for your retirement early but if you can’t, don’t fret. It takes some sacrifice but you can catch up a little later in life also.