Saving for Retirement - It's Not Too Late
By Lyn Dippel
Top 5 priorities if you are behind on savings. Reduce all debt except your mortgage. Use this debt calculator to figure out how to prioritize paying down any debt other than your mortgage.
If the interest rate on your mortgage is less than what you could earn on average in an investment account, you’re fine. However, because the interest is tax deductible, a 4% interest rate if you are in the 36% tax bracket (28% federal plus 8% state), is the equivalent of a 2.56% rate. It would be easy to make more than that in an investment account over time. So, if your mortgage interest rate is high, consider refinancing – and save the difference in your monthly payments.
Reduce the large ticket expenses. We have all heard tips for saving money but most of them add up to very little over time and cause more hassle than they are worth (like coupon clipping, in my opinion). However, things like keeping your vehicles a year or two longer and buying a slightly used vehicle can make a big difference over time. Insurance is another area where many people overpay. Seek advice from an objective source (not from someone who stands to make a large commission on the sale) on the appropriate amount and type of insurance you need. Reduce investment expenses by avoiding high cost commission-based investments and annuities.
Work a few extra years and delay taking Social Security. This has a triple benefit. First, you will have a couple more years to save and for your investments to compound. Second, you will delay the need to withdraw from your portfolio, which reduces the growth; and third, you can delay taking Social Security. Your Social Security benefits increase 8% each year until age 70. At age 62, your benefits are reduced to only 70-75% of your full benefit. By waiting until age 70, they will be 132% of your full benefit – almost double the age 62 benefit. Go to ssa.gov/myaccount and create a login to see your personal payout estimates.
Take advantage of tax deferred savings vehicles and the allowable catch up contribution amounts for those age 50 and older. For example, as an employee with a 401(k) plan, you can defer as much as $23,500 per year, currently. A self-employed person can take advantage of both employer and employee contributions and can currently save up to $59,000 per year tax deferred. Roth and regular IRA catch up contributions of $6,500 are also available to those making under $193,000 for those filing as married and $131,000 for those filing as single.
Save at least 10% of your after tax income and invest it in something that will earn more than inflation. Setting up an automatic transfer is a good way to insure that the designated amount makes it into savings each month. In addition, saving any bonuses or tax refunds, etc., can give you a jump-start. Selecting an appropriate allocation for your investments is important. A good accumulation portfolio should consist of several asset classes for diversification. Equities will generally earn greater returns over time, but bonds and hard assets can stabilize the portfolio in down stock market years. Typically, the equity in these type portfolios will range from 40-60%. Each situation is different, so seek advice from an unbiased professional if you are not certain.
Anything you can do to get started will generate positive momentum. Though each of these steps may seem small, if you are consistent, these efforts can make a difference in no time at all.
Lyn Dippel, JD, CFP®, president of FAI Wealth Management, provides financial planning and investment management for transitions such as retirement, career changes, sale of a business, relocation and inheritance.
This article was originally written for the Her Mind, Her Money Column
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