Over the past few months, I have had meetings with many clients who have not been able to accumulate significant balances in their 401ks and 403bs.
A common theme with these clients is that they will not have pensions in retirement. The employers they work for provide defined contribution plans (e.g. 401k, 403b, profit sharing plan, etc.). With these plans the employee bears all the risk of providing their own retirement income. Under a traditional pension, the employer bears the risk of guaranteeing the stream of income to the worker in retirement.
So, if you are in your late 50s or early 60s and find yourself in this situation, all hope is not lost. There are a few things that you can do to help yourself.
First, take an inventory of your household spending. You can do this in a number of ways. One way is to literally write down every dime you spend over the course of a month – this should include checks, cash, and debit purchases. Some folks use Quicken to help with this. Be sure to account for seasonality in this analysis – meaning that you should estimate the variability between your heating bills (gas/oil) and your air conditioning (electric) in the summer.
Second, as you are reviewing your spending, make note of any debt you may have – credit cards, auto loans or student loans, etc. Be sure to include the monthly payments for this debt in your spending analysis.
Once you complete these steps you should be able to figure out where your opportunity areas are to reduce spending. It is amazing how much is revealed through this type of exercise. If you do not make the effort to look critically at your spending, this is a wasted exercise. I am not suggesting that you cannot enjoy life, but lunch out every day, or stopping at Dunkin’ Donuts for that coffee on the way to work, really adds up.
In terms of other spending, take a look at your house phone and cell phone bills. You do not necessarily need the array of services that are likely costing you an extra $20 to $30 per month. This may also be a good time to review what you are paying for insurance coverage (auto and homeowners) – you could save 10 percent to 15 percent and still maintain the same level of coverage. Cable TV is another area where you are probably spending way more than you need to. Do you really need all of those pay channels? The additional cost for these channels can amount to an extra $40 to $50 per month.
Now let’s take stock of how much you are saving toward retirement. If you are late to the game you should target your savings at 20 percent of your gross income. This may seem extreme and difficult to attain, but if you can do this for five to 10 years before retirement, it can make a tremendous difference. If this sounds outrageous to you, start at 10 percent and try to increase the percentage by some meaningful increment each year until you get to 20 percent.
Finally, if you wait to take your Social Security until your full retirement age, you will receive your full benefit. For each additional year that you wait, your payment will increase by 8 percent. The payments max out at age 70 and can represent as much as a 32 percent increase over your base benefit at your full retirement age.
I hope I have impressed upon you that it is never too late to plan for retirement. Good luck with your planning!
Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.
Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)
The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security. These situations are hypothetical in nature and do not represent a specific client.