When a commercial flight departs late, passengers can all but bank on the captain apologizing once airborne and, in a soothing tone, announce that he can “make up time in the air.” Often enough, he catches a tailwind or leans on the throttle and you arrive as planned without breaking a sweat.
Retirement doesn’t work like that. There are no magical tailwinds you can bank on, and odds are that shifting to risky assets—the equivalent of leaning on the throttle—will only leave you further behind. But take heart: You can make up for lost time on this trip, too. If you’re 50 and haven’t yet left the savings gate, however, you’ll need to make a few changes.
Boomers are famously under-saved. Fewer than half say they are confident that in retirement they’ll be able to afford basic expenses like housing and utilities, according a recent survey from Ameriprise. The average boomer is about $500,000 short on savings, TD Ameritrade reports. Only one in five Americans past 55 has saved as much as $250,000, according to the Employee Benefit Research Institute.
Here’s the deal. You’ve got one last chance to get fiscally fit before time runs out on your ability to retire comfortably. “You need to have the discussion now, while you have options,” says John Sweeney, executive vice president of planning and advisory services at Fidelity Investments. “The absolute wrong approach is to retire and then ask, ‘Now what?’”
Here’s how to take stock of your progress and, in effect, make up time in the air:
See where you stand
At the core of retirement planning is creating an income stream that will replace 80% of your final salary. This can be done in a variety of ways. One couple might manage to do it with little more than two traditional pensions and Social Security. Another might manage with a healthy 401(k) plan that they draw down 4% a year. Your circumstances won’t be exactly like anyone else’s. Likely, it will include a combination of fixed income and drawing down of assets.
Recognizing that most workers no longer receive a traditional pension, planners advise shooting for a nest egg equal to eight to 12 times your final salary before retiring. As a checkpoint, Fidelity has estimated the savings levels required at various points in your life in order to be on track. At 35, you should have saved an amount equal to your annual salary. At 45, you should have saved three times your salary; at 55, five times your salary. The Holy Grail is savings equal to at least eight times your annual salary at age 67.
What’s really important, though, is that you simply get started. “The No. 1 determinant of a successful retirement is how early you start saving,” Sweeney says. Because of the power of compounding, time ranks ahead of how much you save, how you allocate your assets and which securities you own. At 50 or even 55 you still have 20 years of growth to help bail you out. Saving $1,000 a month for 10 years and then letting it alone for another 10 years, earning 5% a year, would give you $260,000.
Take advantage of catch-up incentives
You can get the most bang out of your savings by using a tax-advantaged account and, where possible, benefiting from an employer matching contribution. Maxing out such accounts is the right move for most people looking to power save late in their working life.
Tax law recognizes that millions of people nearing retirement have not saved enough. So the IRS allows people 50 and older to contribute an extra $5,500 to a tax-advantaged 401(k), 403(b), and most 457s government thrift savings plans. That is on top of the 2013 limit of $17,500.
For traditional and Roth IRAs the catch-up provision for those past age 50 is $1,000, which is on top of the 2013 limit of $5,500 for everyone else. You may also qualify for a $1,000 Retirement Savings Contribution Credit if your household income is below $59,000 and you participate in a plan.
These are valuable tools that allow you to put away additional tax-deferred savings or, in the case of the Roth, additional funds that will grow tax-free. The issue that many run into is where to find the extra money to stash in these accounts. That goes to your lifestyle and spending habits, which may need an adjustment.
Identify additional sources of saving
The easiest way to save more is by earning more or by earmarking future income streams for savings. When you get a raise at work, bank the difference. When you pay off a loan, keep making the payment—to your savings account. Arrange for a higher automatic contribution to savings, and one that escalates each year as well. This is called paying yourself first. It’s remarkable how little you miss income that you never see. Make certain that you are capturing every penny of an employer match in a work-based savings account.
Cutting expenses is a little tougher. The first one you should tackle is interest expense on consumer debt. Pay off your highest rate credit card first and then all others. Most people could get along fine with a lower-cost automobile. If you really want to goose savings, downsize your home and move to a lower cost neighborhood. There are many other ways to find additional dollars to save. It isn’t easy. Yet anyone can do it.
Plan to work longer
Working longer is not an option for everyone. Health issues, corporate downsizing, and a brutal labor market mean that many will not be able to take this strategy to the bank. Just one in five retirees who had planned to work longer in order to keep health insurance were able to do so, EBRI found.
But if you can work longer, it’s the closest thing out there to a silver bullet. Working longer means you’ll not only delay tapping savings but also continue to add to your nest egg, a powerful combination that changes the calculus over just a few years. “It gives you more time to prepare,” says Christine Fahlund, senior financial planner at fund company T. Rowe Price. “Maybe you can pay off the mortgage and get some other big expenses out of the way.”
According to a T. Rowe Price analysis, a 60-year-old couple with household income of $100,000 and savings of $500,000 would benefit immensely by staying on the job to age 70, vs. retiring at 62. Working to 70 would give them retirement income of $96,000 a year vs. retirement income of just $52,000 at age 62.
If working longer with your current employer isn’t an option, you may be able to take a lower paying and maybe even part-time job that gives you enough income to delay tapping your savings even if you can longer save a dime. In the T. Rowe Price example, the couple working to age 70 enjoyed retirement income of $88,000 a year—above the 80% replacement bogey that planners shoot for—even without saving a dime from age 60 to 70.
Delay Social Security
One of the reasons the math works in the T. Rowe Price example is that the couple was able to delay Social Security benefits for eight years. This is the easiest money out there for folks who are in good health and don’t need the income right away. Monthly benefits increase 6% to 8% each year they are deferred. So the couple that would have got $30,000 a year from Social Security at age 62 instead gets $53,000 at age 70—for as long as they live.
“That’s a guaranteed benefit; it’s very, very valuable,” Christine Benz, director of personal finance at fund research firm Morningstar, noted in a recent online presentation. Still, Benz says that taking early Social Security benefits might make sense if your best alternative is to sell stocks in a depressed market. Which is why working longer, and earning some income, is such a big part of the solution—and just might be the closest thing that you can find to a magic tailwind.