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For many people age 50 is a natural time for reflection. In retirement planning, it is a crucial time because you still have plenty of time to improve your chances of meeting your goals. Here are a few tips for making sure you stay on track for a successful retirement.
Compare your total savings to your income. When clients retire we usually recommend they have at least 10 times their annual take-home pay accumulated in their savings and investment accounts. As clients enter their 50’s we begin calculating this ratio and assessing the capability to “Fund their retirement income needs.” Of course everyone’s circumstances are different, but several retirement planning sources recommend that clients need at least 5 times their projected retirement income in savings and investments by age 50 to have a reasonable chance of retiring comfortably later in life.
Pay yourself first. After many years of financial planning, we consistently notice that clients, “Who save for their retirement first in their budget” build personal wealth more effectively than people who don’t value saving. That does not mean you have to adopt an oppressive budget, or put off life’s pleasures. It just means you should save some money regularly. An automatic draft to your savings account can make this task easy. If you are not paying yourself first, you are probably behind in your retirement savings.
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Contribute the maximum to your retirement plans. The biggest financial obstacle for most people is saving enough for a comfortable retirement. That's why it is also important to maximize contributions to your employer-sponsored retirement plan or IRA so you can take advantage of tax deferral and other potential tax benefits. We constantly remind people that tax deductible retirement saving is the only way to “spend money and still keep it,” because the contribution remains in your IRA or retirement account after you pay your income taxes. When you reach age 50 you can contribute up to $24,500 in your 401K, 403B, 457B or Federal Thrift Plan each year. Also, you may be able to annually add up to $6,500 to a Regular IRA or Roth IRA depending on your gross income.
Reduce your debt. Having some debt is normal for almost everyone, especially while you are young. We Americans usually finance our homes, autos and other large purchases. However, as you grow closer to retirement, reducing debt becomes more important. We recommend clients structure their mortgages to be paid off by the beginning of retirement. In reality, “You can borrow for most of life’s needs … except retirement,” so don’t borrow from your 401K plan if you want to keep your retirement plan on schedule.
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Get a formal, written retirement income plan. Things are never as easy as they seem including retirement planning. If you get it wrong, you probably won’t have a second chance. In a recent survey only 11% of workers reported, “They prepared a formal, written financial plan for retirement, while 44% reported they thought about how they would occupy their time in later life (Employee Benefit Research Institute).” Without an effective retirement plan, you are likely falling behind on your retirement goals.
On a positive note, if you don’t want to suffer through learning everything about retirement planning, you can always turn to a professional for assistance. We suggest that you look for a Certified Financial Planner. These financial advisors are qualified by education and experience. Plus CFP ethics require they act as a “fiduciary,” always putting your interest first.
Columnist Van Sievers, CFP(R), CPA, AEP, is a general partner of TrueWealth Advisors LLC.