According to the National Institute on Retirement Security, 32% of working households aged 55-64 have no retirement savings.1 Of those who have retirement savings, 32% have less than their annual income in their retirement account. In order to continue your standard of living in retirement, it is recommended that you have at least 85% of your pre-retirement income in savings. Such high rates of middle-aged adults reaching retirement age without a retirement savings account or enough money saved if they have an account, reflects what some experts in the field are calling a Retirement Savings Crisis. To get some advice on how to handle this crisis, I turned to a local financial advisor who was able to provide me with advice to share below.
What can middle-aged adults do to plan for retirement?
One the first things you should do when planning for retirement is think about your goals. It is important to know what you want your retirement to look like. Consider how much you will likely spend, what kind of income you will have, and what assets you will have in retirement. Knowing what you would like to accomplish will help you determine the best path to obtain your goals. Remember that time is on your side. The longer you wait to save, the more it costs you.
What can you do to prepare?
Employer Retirement Plans
Take advantage of employer retirement plans. Many employers will match the amount you contribute to a 401(k) savings plan up to a certain percent of your salary. If your employer will match 8% of your salary, it is beneficial to contribute the full amount so that you will receive the full match. Using employer-matching programs is suggested because, as long as you contribute, you can receive free money. Since you don’t see the money before it is put into the account, you won’t be able to miss it.
Individual Retirement Accounts
Another good way to grow your money is to contribute to an individual retirement account (IRA). IRAs are containers where your money can be safe and have the ability to grow. The two types of IRAs are Roth and Traditional. Contributions to Roth IRAs are taxed before entering the account and contributions to Traditional IRAs are taxed as an income when you take money out of the account. The maximum yearly amount that can be contributed to both types is $5,500 per year, but increases to $6,500 each year when you are age 50 and older. Both types allow you to access the money at age 59½ and Roth IRAs have no specific age at which you must access your money. Traditional IRAs require you to take money out by age 70½. Thus, for those who are beginning to plan for retirement when you are in your 50s, there are options for you to save more in IRAs to grow your savings faster.
Build Your Portfolio
When investing, it is crucial to consider your openness to risk. You need to be comfortable with where you put your money. The two major types of investments are fixed income investments, such CDs and bonds, and equity investments, including stocks and emerging markets. You can determine the best choice of investment based on your goals and risk tolerance. Fixed income investments tend to be more stable and acquire less growth than equity investments. There is more risk and fluctuation involved with equity investments; however, they tend to grow more quickly.
Advice for middle-aged adults?
Provide Choices and Balance
Provide yourself with options when you need to access money. It is necessary to have an emergency fund to cover about three to six months worth of expenses. Also, balance your investments so that all of your money is not tied up in one place.
Think About Social Security
Don’t count on Social Security to be available when you reach retirement age. However, you should still think about how it could influence your retirement plans and when you might draw benefits. The longer you wait to draw Social Security benefits, the larger your payment will be. Payments can be maximized by waiting until you are 70 to receive benefits. Again, having your goals in mind will help you make these kinds of decisions.
Consider Working Longer
By working longer you will be able to continue saving money towards your retirement, and delay or reduce withdrawals from your retirement accounts. Many workers ease into retirement by gradually reducing their hours at work or by working a part-time job.
If you are not where you would like to be, don’t panic. You can always make adjustments to your saving and spending habits to help you get on the right path. Your investments will fluctuate with the market, so try to stay focused on your long-term goals and don’t give up at the first market downturn.
- Rhee, N. (2013). The retirement savings crisis: Is it worse than we think? National Institute on Retirement Security, 1-26. Retrieved from http://www.nirsonline.org/storage/nirs/documents/Retirement%20Savings%20Crisis/retirementsavingscrisis_final.pdf