With retirement in the crosshairs, you might suddenly be worrying that you haven't saved enough—or invested wisely enough—for a secure retirement. You're by no means alone. According to a recent survey by the Transamerica Center for Retirement Studies, fewer than half of retirees believe their savings are adequate.
The good news is that if you're in the middle of your career, or even getting closer to retirement age, there's still time to make tweaks to your savings and investment program that will shore up your retirement. Every little bit helps—don't let your worries stop you from taking action now.
Consider these moves.
Take inventory of your savings and create a forecast.
While you may have a rough idea of how much money is in your retirement accounts, do you know how much you can spend so you don't outlive your retirement assets?
Financial advisors say you should aim to replace 70 to 80 percent of your pre-retirement income if you want to maintain your pre-retirement lifestyle. Forecast what your sources of income will be when you retire, including pensions, Social Security, rental income and your savings. Then use this rule of thumb to calculate how much annual income you can expect from your nest egg:
In the first year, take 4 percent of your total savings to use as your retirement income that year. Then each year thereafter, increase your retirement income amount by the inflation rate. For example, if you have $1 million in savings, you should withdraw no more than $40,000 during your first year of retirement. The next year, if the inflation rate was 3 percent, you'd increase your withdrawal by $1,200 (3 percent of $40,000), and so on.
If all together, your income sources still don't add up to 70 to 80 percent of your current working income, you might have some tough choices to make: Work longer (or even part-time) or reduce your lifestyle expectations.
2. Save more. And then even more than that.
There's no substitute for savings. The later you start, the more you must save to get to the finish line. But that doesn't mean you shouldn't dive in and save now. Even small amounts of extra savings today can translate into more retirement income down the road, when you'll need it most.
Consider this: Say you're 10 years away from retirement. Saving $10,000 a year for the next 10 years could mean adding another $132,000 to your nest egg (assuming a 6 percent compound rate of return).
One easy way to save more later in life is to take advantage of catch-up contributions to your 401(k) and IRA. While the normal annual contribution limits for these accounts are $19,000 and $6,000 respectively, after the age of 50, you're allowed to contribute an additional $6,000 a year to your 401(k) and an additional $1,000 to your Roth or traditional IRA.
3. As you move toward retirement, adjust your asset allocation to be more conservative, but don't stop investing.
While you've been saving for retirement, you probably concentrated on more aggressive growth strategies to maximize your return. But with retirement nearing, growth must be balanced with the new goal of preserving your capital so you can withstand periodic economic downturns.
But once you've entered retirement, don't ditch stocks entirely. After all, retirement could last 30 years or longer, and you'll need your money to continue to grow. The key is make sure your money is growing and holding its value. Like most things in life, finding the right balance is key.
A common rule of thumb used to figure out what percentage of stocks and bonds to hold is to take 125 and subtract your age. Therefore, at age 60, consider holding 65 percent of your portfolio in stocks and 35 percent in bonds. And don't invest money that you'll be needing to spend within the next five years—there are no guarantees with investing, after all.
4. Plan which accounts you'll draw retirement income from first.
Carefully consider how you tap your retirement assets, because each type of account has different tax rules. Traditional 401(k)s and IRAs, for example, are taxed as ordinary income when you make withdrawals. Taxable investment accounts are only taxed on gains—potentially at a much lower tax rate than ordinary income. Meanwhile, Roth 401(k)s and Roth IRAs are funded with after tax dollars, but withdrawals are tax free.
Generally, financial advisors recommend making withdrawals in this order:
- Traditional 401(k)s and IRAs: Spend down your highest taxed asset first.
- Taxable accounts: Move on to the asset that's taxed at the lower capital gains rate.
- Roth 401(k)s and Roth IRAs: Allow this most favorably taxed asset to grow as much as it can before you tap into it.
And consider postponing the date when you start claiming Social Security as long as possible. While you're allowed to claim benefits as early as age 62, if you do so, your monthly check could be reduced by as much as 30 percent. But by waiting not only till your full retirement age to claim, but even a few years later, you'll qualify for delayed retirement credits that will increase your payment. You can increase your Social Security benefit by 8 percent for every year you delay, until age 70.
5. Create your own pension
You may be looking longingly at the bygone era of pensions because of the certainty they provide their beneficiaries. But there is a way you can create your own version of a pension.
Guaranteed Lifetime Income Annuities are becoming increasing popular among retirees, as many of them are concerned about potentially outliving their assets. Features such as joint life coverage, period-certain benefits and cash refunds allow investors to customize their “personal pension" based on their individual goals and concerns.
Because annuities can be very complicated, it's best to consult with a financial advisor to find out how they can supplement your retirement income.
Early savings is always the preferable way to create a secure retirement. But sometimes life doesn't work out that way. With retirement approaching, you might need to play catch up and make some adjustments. Be clear eyed about the steps you need to take today so your retirement savings can live as long as you do.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bankoh Investment Services or its affiliates to buy or sell any securities, investments, or insurance products. Where specific advice is necessary or appropriate, consultation with a qualified tax advisor, CPA, financial planner, or investment manager is recommended. Asset allocation and diversification do not assure a profit or protect against loss.Investment and insurance products are offered and sold by Bankoh Investment Services, Inc., a nonbank subsidiary of Bank of Hawaii and a member of FINRA/SIPC. Investment and Insurance products are NOT FDIC INSURED, NOT BANK GUARANTEED, NOT A DEPOSIT, AND MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL.