When it comes to planning for retirement, the move from defined benefit plans to defined contribution plans began in 1978 when the Internal Revenue Service passed the Revenue Act allowing employees to defer some of their compensation. This law, Section 401(k) of the Internal Revenue Code, spelled the beginning of the end for many defined benefit plans, as companies began to shift the burden of pension planning from themselves to their employees. Unfortunately, for a variety of reasons, many Americans did not begin to save on their own as they should. According to the Insured Retirement Institute (IRI), 4 in 10 baby boomers have no retirement savings and, of those who do have retirement savings, “59 percent have saved less than $250,000 and 37 percent have saved less than $100,000.” First and foremost, recognize that according to the Pension Benefit Guaranty Corporation there is less than 25 percent of the number of private pension plans now as compared to 1983, and so YOU shoulder the responsibility for providing yourself a secure retirement.
Take action sooner than later
The first step is to start planning and take action sooner rather than later. If you can’t afford to max out your employer-sponsored 401(k) or 403(b) whose limits are $18,000 for those lucky enough to be under age 50 and $24,000 for those of us 50 and over, at least maximize the company match. An example of this might be a company match of 50 percent for every dollar the employee contributes up to 6 percent of his/her salary. Therefore, if you contribute 6 percent, your employer will deposit 3 percent. Not a bad deal. If you began saving $5,000 per year in your 401(k) at the age of 40, assuming an average annual return of 6 percent, you will accumulate approximately $274,332. However, if you wait just five years until you are 45, that total will decline by $91,394 to $183,928! Furthermore, let us assume that at the age of 40 you took the initiative to enroll in your 401(k) as well as contribute the $5,000 per year, but were too conservative with your investment. As noted above, an average annual return of 6 percent would accumulate approximately $274,332. However, if that annual return is reduced to 4 percent, the accumulated fund at age 65 would drop by $66,102 to $208,230—a steep price to pay.
For the 10,000 Americans who will retire every single day for the next 20 years, accumulating enough savings represents only one component of a thorough retirement plan. Other considerations include:
Social security: Log on to www.socialsecurity.gov to check your Social Security benefits. If you have not received a paper copy of your statement, it is because SSA mails paper statements only on every fifth birthday until age 60 and then on an annual basis. Online you will be able to check that your earnings have been accurately credited to your account and see approximately what your benefits will be upon retirement. Furthermore, begin to educate yourself(ves) regarding your options, as well as how to coordinate yours along with those of your spouse.
Estate planning: Begin to investigate, plan for and then formalize an estate plan, including should you become incapacitated. This includes the financial implication of long-term care needs in a nursing home or hiring somebody to come in to your house. Get familiar with Medicare, its costs and benefits, as well as purchasing a supplement to cover what Medicare does not.
Budgeting: Get your budget in order. It’s all about income versus outgo. Look to perhaps pay off debt (although not too aggressively as interest rates are at or near all-time lows), especially non-deductible debt such as credit cards, automobile loans and consumer loans.
Living location: Finally, as space is limited, consider where you want to live upon retirement. Are you going to remain in your current home? Are you going to remain in your current state? What are the tax implications of moving, if any? Should you gift your home or other assets or perhaps place them in a trust? Take some time and cover all these bases, as well as some others. It will be time well spent.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks, and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, call 279.1044.