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In the April 2012 Merrill Edge ReportTM, 93% of the respondents expressed concern that their retirement savings might not be sufficient to support them for a lifetime. If you share that concern, here are five steps to help get you closer to a comfortable retirement.
Even if you've fallen behind, you can still get your financial strategy on track.
1. Put away a little more. Beginning in the year you turn age 50, you're allowed to make annual catch-up contributions to a 401(k) plan or IRA, with total limits higher than for those under the age of 50: Adding a little extra to your retirement savings each month could pay big. For example, putting an additional $25 a week toward retirement — what you could save by having breakfast at home instead of grabbing something on the way to work — could come out to $1,200 a year. Assuming a hypothetical annualized rate of return of 7% and continuing that weekly contribution of $25, in 10 years that could mean an additional $16,780 in your retirement pot. After 20 years, your nest egg could grow to more than $50,500.1 If you can't find the extra cash now, consider pledging to up the ante if you receive a salary increase, bonus or tax refund. Also, if you have a mortgage, consider refinancing to find additional dollars that you can invest. Rates have been at historic lows, so even recent mortgages may benefit. But weigh your closing costs against how long you plan to stay in your home to determine whether it's a smart move for you.
- No matter where you are in your retirement planning, you can take steps to pursue a comfortable retirement.
- Strategies may include trying to save more, working longer, delaying Social Security, reassessing your housing situation and realigning your portfolio.
2. Work a little longer. According to the 2012 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, 22% of workers have postponed their planned retirement in the past year. Postponing retirement can make a lot of sense. Most of us are healthier than the average retiree of a generation ago, says Bill Hunter, Director, IRA Product Management, Merrill Lynch. Working a year or two longer can not only boost your savings considerably but also give your investments more time to grow. What's more, you won't have to stretch your retirement assets over as many years. "That doesn't mean you have to stay in the same job," Hunter says. Consider whether you'd like to work closer to home, for example, or in a field you're more passionate about.
3. Put off Social Security. You can opt to start taking benefits as early as age 62 or as late as age 70. But for every year you delay after age 62 and up to age 70, your annual Social Security income will increase an estimated 7% to 8%. If you wait until age 70 instead of 62, your monthly check could grow by 50%, says Hunter, who recommends dipping into a retirement portfolio rather than drawing down Social Security too early. "Where else can you get an 8% return with that kind of low risk?" he points out.
4. Rethink your housing situation. If you no longer need the space you once did, consider downsizing. Reduced living costs — including transportation as well as housing and maintenance expenses — could free up cash to put into savings, and you could invest any profits from the sale. You might even think about relocating to a neighboring town with lower property tax rates, or to one of the seven states with no income tax. (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no personal income tax. New Hampshire and Tennessee have limited income tax on individuals and tax only interest and dividend income exceeding certain amounts.) If you're entering retirement, consider factors such as your future ability to climb stairs and whether you'll have reasonable access to stores and doctors' offices when you no longer want to drive.
5. Realign your portfolio. Your asset allocations2 should typically become more conservative as you approach retirement, but consider continuing to hold some stocks for potential asset growth to help offset inflation, since you could have 20 or more years in retirement. Despite recent experience, stocks have generated the highest return of all investment classes in the long run.3 "The main priority," Hunter says, "is to have a disciplined approach to investing."