By Kevin Gibbons
Everyone talks about the importance of starting to save for retirement early in your life. There are countless articles and podcasts advising young earners right out of college (and even some talking to teenagers) to start saving right away. And make no mistake, that is good advice. But even if you are more advanced in your life and career, you don’t have to feel like you’ve missed your one chance at a happy retirement. There are still things you can do, even with a later start, to set yourself up for a solid financial future.
With the conclusion of tax season, many people’s attention turns to the state of their long-term savings accounts, 401(k)’s, IRAs and other investments. While leading up to April 15th, the main focus tends to be on contributing for the maximum tax relief, afterwards, people and their investment advisors may shift their concentration to the overall size of the portfolio and how it stacks up against the long term (retirement) plan. The Sightlines Project at Stanford University recently published an in-depth report on “Seeing Our Way to Financial Security in the Age of Increased Longevity.” Today, I want to discuss one narrow aspect of the report dealing with the question “Are Americans Saving Enough for an Adequate Retirement?” (I strongly recommend reading the entire report, even though it is quite long. It contains a wealth of information on home ownership, saving for retirement, the effect of gender inequality on financial security and a number of special feature reports.)
I’ve seen several reviews and summaries of this report that focus on the often-heard position that if you don’t start saving by the time you are 45, you have to put away an inordinately high percentage of your income (25 – 27%) to have enough to retire. For many people, who have for one reason or another, have not started saving earlier in their careers, this can seem like an impossible mountain to climb. They wonder if it is worth it to even try to save when the bar is set so high. My response to that feeling is Don’t Panic – But Do Act.
While everyone will agree that starting your long-term savings as early as possible is the best way to achieve your goals, for those who are starting later, there are important options to discuss with your financial advisor. The first option is to understand the entire set of data presented in this report:
Table 2.1. Suggested retirement contributions as a percentage of current income, including employee and employer contributions.
The caveat to the 25 – 27% savings requirement is, that is what is needed if you want to retire at age 65. If you decide to work just an extra five years, and retire at age 70, the savings levels are much more reasonable (10 – 14% of your income). In fact, the gist of this section of the report is that most Americans are not saving enough to retire at age 65, so what can be done by policymakers, employers, and workers themselves to ensure people are adequately prepared for retirement?
The report offers several recommendations:
- Policymakers can expand retirement plan coverage.
- Employers can adopt auto-enrollment in work-based retirement savings plans, and provide employees with estimates of their retirement income from both savings and Social Security, so they can get a more complete picture of their situation.
- Employers can offer alternate career paths for older employees who may work past age 65.
- Employees need to adopt some combination of working longer, saving more, spending less, and making every dollar count by adopting efficient investment and retirement income strategies.
Let’s look at that last recommendation, the one addressed to employees (that’s us!)
- Working longer. The Special Report states that “in the past 50 years, life expectancy in the U.S. has changed drastically, from close to 70 years old in 1960 to nearly 79 years old by 2015.” In addition to simply living longer, many people are remaining healthy and active later in life. We’ve all heard the advertising campaign “50 is the new 30.” While that may be hyperbole, it is true that many of today’s 70 year-olds are as active and vibrant as 50 year-olds from the 1960s. One important consideration to keep in mind is that working until (or past) 70 does not necessarily mean working in your regular 40-hour/week job for that entire time. Depending on your individual situation, you may be able to earn and save enough working part-time, or at a “hobby career.”
- Saving more and spending less. Saving more and spending less does not necessarily mean doing without. In many cases, you can achieve your savings and spending goals by repurposing your money. The key to saving more and spending less is to create a viable Spending Plan that lets you track your spending and plan where every dollar goes. By being purposeful and intentional regarding how you spend and how you save, you can be certain that your money is being used to achieve the goals and lifestyle you want, minimizing waste and reactionary spending.
- Adopting efficient investment and retirement income strategies. This is where a good financial advisor is essential. Just as “a lawyer who represents himself has a fool for a client,” managing your own investment portfolio is a daunting undertaking. Professional advisors not only have the training and resources to have a much broader and deeper understanding of the financial engines than the typical layperson, but their professionalism can remove the emotion from many decisions. When we are emotionally invested in a poor decision, we tend to resist cutting our losses. We may be attracted to an investment opportunity for reasons other than its financial soundness. Finding a reputable financial advisor who listens and understands your goals and situation is critical to protecting and growing your long-term savings investment.
So, as you come out on the other side of tax season, if you see yourself lagging behind in your long-term retirement savings, Don’t Panic, But Do Act. Understand your situation and start working with a professional today to develop the plan that will work for you. In most cases, you can craft a workable plan if you and your team understand your situation and your goals.
Kevin Gibbons is the Chief Operating Officer of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 525 individuals and families to create Spending Plans.
They also work with financial advisors and their clients doing cash flow planning as well as giving Savvy Living presentations via webinar and in-person to audiences across the U.S.
To learn more about how Kevin and Melissa work with clients, visit The Savvy Life’s Programs Page.
If you’d like to learn more about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page