Life is full of unexpected situations that may have required you to pull from your retirement savings to cover pressing, unanticipated expenses. Although such situations can present challenges to the integrity of your retirement fund, there are several things you can do to reinvigorate your savings.
First, identify what caused the drain in your retirement savings. This step may seem obvious, but it’s important to take time to evaluate the factors that led to your emergent situation so that you can take steps to avoid them again in the future. With time and careful consideration, you can prepare for future unexpected situations.
Generally, it is advisable to save cash reserves to cover expenses for anywhere between three and six months. If you’re a homeowner, you should be able to cover six to 12 months. In addition, you should keep the amounts of the deductibles for your homeowners, flood, car, and health insurance. As an added precaution, set aside 1 percent of your home’s value each year for repairs.
Next, cut expenses and prioritize retirement. Because people spend the majority of their careers thinking that retirement is far away, other more immediate expenses often take priority over saving for a seemingly distant eventuality. However, dipping into retirement savings to cover an emergency signals that spending less on lower priority expenses may be necessary in order to recoup your losses. To help you accomplish this, refer back to the first step and evaluate what expenses you can minimize or maybe live without (at least for a while). Finding tax preferential vehicles such as municipal bonds, MLPs, and real estate in addition to the retirement accounts you already hold can help you get back on track as well.
Start saving small amounts to develop good saving habits and begin replenishing your retirement fund. Easing into monthly saving can help you get your retirement savings back on track without presenting you with a harsh burden. Starting by saving just 1 percent of your annual income in a company retirement plan helps you form a habit of saving. The 1 percent amount is small enough that it won’t be missed but big enough to keep the need to save for retirement fresh in your mind. It also helps you to save more as time goes on. By increasing the amount you save by an addition 1 percent of your income every other month, you will quickly be on your way to substantially rebuilding your retirement savings.
Eventually, you should increase your contributions to company retirement funds to the maximum amounts allowed by your 401(k)s and IRAs. Taking advantage of matching employer contributions will also be beneficial. If you are aged 50 or above, you can also potentially take advantage of up to $1,000 in catch-up IRA contributions and up to $6,000 for catch-up 401(k) contributions.
Pursue an extra job or income-generating side project to help fill in the gap.
Picking up a second job or an extra client or two can help generate additional income that can be set aside for retirement without impacting present-day expenses. If your spouse or partner does not work, having him or her join the workforce can be a great boon. Alternatively, if you are already retired, consider turning a hobby into an income-generating project. Or, apply to a big company, whose employee insurance plan can help cover healthcare costs. However, if you are unable to pursue any of the examples above, even simple things like tutoring or helping neighbors with some yard work can help supplement other income.
Delay retirement and social security to make sure you have more money for later. The best way to improve a retirement portfolio’s longevity is to delay drawing on it. Delaying retirement allows more time to build greater savings and also ensures that saved funds that you have accumulated will last longer into the future because they are being drawn on later in time. If you delay your social security benefits until after retirement age, your benefit grows with each year of delay.
If you’re a homeowner and your home has sizable home equity, consider a reverse mortgage. A reverse mortgage allows people aged 62 and over to receive tax-free cash in a lump sum or fixed payments. Moreover, the mortgage does not need to be paid until the homeowner moves out or dies. However, there are closing costs associated with this type of mortgage, and the homeowner must maintain the home. Although seniors often consider a reverse mortgage to be a last resort, it is a viable option provided that it is obtained from a reputable lender and that the homeowner understands how the mortgage works.
Many people spend most of their working years setting aside money in a retirement account. Whether this happens in the form of independent 401(k) contributions, employer benefits, IRAs, pension plans, or a combination of savings strategies, Americans have plenty of options available to build up their retirement fund during their working years. However, a recent GoBankingRates survey reveals that 23% of Americans have less than $10,000 saved for retirement and one-third of Americans report that they have no retirement savings at all. This means more than half of Americans have barely saved anything for retirement. So how confident are today’s retirees about their financial future? Here’s a closer look:
Making the Decision to Retire
One of the first things Americans need to consider as they approach retirement age is when they want to officially retire, or stop working and earning a paycheck. This is where the retiree would live off Social Security benefits, a pension plan, and any personal savings they have accumulated over the years. The full retirement age is 67 for those who were born in 1960 or later but it’s important to note that those who delay retirement until age 70 can qualify for more Social Security benefits. Deciding when to retire to claim Social Security benefits and when to stop earning money is important for financial planning since these decisions will influence how much money the retiree can save and enjoy during retirement.
Building Retirement Savings
Individual retirement accounts (IRAs) and 401(k) accounts are some of the most popular types of retirement plans among working Americans but there are several other options available for those looking to generate a steady stream of income through their retirement years. Getting the maximum 401(k) match from an employer through all working years is a smart way to build up retirement savings. Working for employers that contribute to Simplified Employee Pension (SEP) plans and Salary Reduction Simplified Employee Pension (SARSEP) Plans is another way to increase retirement savings.
Contributing to a Traditional or Roth IRA consistently over several years and decades will provide an attractive return on investment as long as the account holder doesn’t make any early withdrawals. Buying fixed-rate annuities before reaching retirement age or even during retirement can help to secure a guaranteed revenue stream for years to come. While these annuities provide a fixed income stream, it’s important to keep in mind that they will not adjust for inflation over the years. Those who want to take advantage of any signs of growth in the market may fare better with variable annuities. Working with an experienced financial planner can help to determine investment priorities and create an attractive retirement portfolio.
Low Confidence in Retirement
AARP recommends calculating living costs at 70 to 80 percent of preretirement income but many financial planners suggest planning for 100 percent of preretirement income for at least the first 10 years after leaving the workforce. According to the Employee Benefit Research Institute, 24% of workers were not at all confident that they had saved enough money for retirement while 36% were somewhat confident, as of 2014. Whether they’ve lived a long life of struggling financially and never made room for savings or simply had other financial priorities, it’s clear that many retirees cannot expect to live comfortably without a paycheck or other sources of income. Some may end up depending on family members for financial support while others will continue working during retirement to pay for basic expenses.
Individuals approaching retirement age who plan to work and earn through their retirement years may be able to recover any missed savings opportunities from their youth. Prioritizing finances and making an effort to cut costs can also help to reduce living expenses and maximize a retiree’s savings potential. With so many retirees dissatisfied with their retirement nest egg — and many without any retirement savings at all — it’s important for all Americans to make retirement planning a priority at an early age.
Those most successful at putting money away—whether through savings, investments, or retirement structures—most likely have at least one thing in common: They give regular attention to the picture of their finances and how they are managing them. Much like your physical health, your financial health is dependent upon taking a proactive, rather than a reactive, approach to its maintenance. For most investors this makes sense in theory, but when it comes to the actual implementation there is a lot of noise, all of which can be misleading if taken out of context, especially if the advice doesn’t necessarily pertain to your personal financial picture.
As we always remind our own investors, all good financial advisors will make sure to learn about your individual situation before providing any advice, so take this information with care. However, the four things we list below are crucial pieces of the financial puzzle, which apply to nearly anyone trying to grow wealth, in any amount.
Pay attention to your consumer-debt ratio: While pretty much a given, even the New York Times will tell you that you always want to be earning more than you are spending—probably because it bears reminding in this consumer-drive society. Your consumer debt ratio is determined by dividing your assets by your liabilities. Now, ideally, this number will be positive, indicating that you own more than you owe. More often than you’d think, however, the reverse is true. According to a study by popular Nerd Wallet, the average household is continually growing and currently at about $130,922. With social security disappearing, this is particularly concerning for the younger generations. More on that below.
Create an Emergency Fund: Like a savings account, this money sits aside in the event that you need access to an unusually large amount of liquidity, in a short period of time. The standard emergency fund amount recommended is the equivalent of three months salary, however, if you are a dual income home, make that the equivalent to 6 months of salary. Emergency funds ensure a certain amount of flexibility should something unexpected—a sudden accident or illness, or the need to take time off from work—befall you or your family.
Max out your retirement accounts: This is important at any age, and especially as you get closer to retirement, but its equally if not more important when you are young. In addition to the fact that social security is only guaranteed until 2035, this allows the younger generation to put money away when they don’t need to use it to care for dependents. It also encourages a habit early on, that will ideally compound over a lifetime. It’s also helpful to actively picture what your retirement looks like, so that you have some idea of the type of lifestyle you are saving toward, and what it will cost to support that. For more tips on saving for retirement read “Making the Most of Life After Work.”
Be respectful of inflation: This is true with regard to the national inflation we experience collectively, but should also be taken into account with the natural inflation that occurs in each of our lives as we age. Many people fail to track their earning and spending trajectories based on their future circumstances and situations, which can wreak unexpected havoc when significant shifts in spending are caused due to big life transitions, like moving or having a baby. Planning well in advance of the natural inflation of your life will also be helpful in protecting your financial health.
Credit Score: Of course, we can’t leave out the credit score. While bemoaned for its haunting qualities in many situations, your credit score can very easily be coaxed to work in your favor as long as you treat it right. And these days, it can dip or rise within a matter of days based on your recent financial activity. Some people simply ignore their credit score, allowing it to work entirely to their detriment by not paying attention, but those who are proactive about their rating can do infinitely more good. Just take a look at U.S. News and World Report’s strategies on quickly raising your credit score.
Studies show that those who are cognizant enough of their finances to be able to easily check in on and understand the above are far more likely to experience financial success because they are, in essence, conditioning themselves for it.
Visit Goldstone Financial for more information on how to ensure your financial health.