You Can Recover from a Late Start on Retirement Planning

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06/05/2019

The last thing you want to worry about going into retirement is your finances, yet so many of us are in that exact spot.

Concerned about retirement? You aren't alone

About 78% of Americans say they’re “extremely” or “somewhat concerned” about not having enough money for retirement, according to Northwestern Mutual’s 2018 Planning & Progress Study, which surveyed 2,003 adults. Another 66% believe they’ll outlive their retirement savings, and 46% of those haven’t even prepared for that possibility. This may seem hard to believe, but one-fifth (21%) of Americans haven’t socked away a dime for the future, and another 10% have less than $5,000 saved for retirement, the Northwestern Mutual study found. On average, Americans who’ve saved for retirement have $84,821 in the bank, which is a good start, but still a far cry from the $1 million or more that financial experts recommend.

Five common quandaries

Here are five all-too-common financial quandaries people in or close to retirement experience – the good news is that you can recover from them, and enjoy brighter days ahead.

"I waited too long"

The scenario: "I waited too long to start saving (or I didn't save enough)." You’re definitely not alone in this scenario. When Bankrate asked people why they’re in a retirement savings deficit, they said expenses are the biggest obstacle, with 39% of respondents pointing to this as the main reason they’re not saving. Another 16% said their salary doesn’t allow them to save, and an additional 16% said they aren’t saving more because “they just haven’t gotten around to it.”

What to do: First, look to cut expenses where you can in your daily life to get on the path to savings. That includes just sticking to your shopping list and cutting out the non-essentials. Make your morning coffee at home during the week. If you want to eat out, go for lunch instead of dinner. Invite friends over instead of going out. Holiday shop for the next year right after the holidays. Go green when you can by turning off the lights or dialing down the heat. Sell what you’re not using to make some extra cash. (Get more tips in our article, “Here’s How to Live the Retirement of Your Dreams.”)

In addition, harness the power of compound interest, which usually works best when you start saving early. However, you can still take advantage of it even if you’re a late-bloomer saver: For example, if you max out your Roth IRA at $6,500 annually from ages 55 to 65, you could stockpile up to $128,000. However, if you start by age 52 and retire a little later, you could end up with up to $270,000 tax-free at age 67.

“I tell clients to invest in tax-advantaged accounts with the guidance of a financial advisor,” says Alex Clarkson, a financial advisor with of Matawan, NJ-based Independent Financial Solutions Inc. These include Roth IRAs and tax-free savings accounts (TFSAs).

 

 

I tell clients to invest in tax-advantaged accounts with the guidance of a financial advisor.

 

If you’re 50 or older, the IRS lets you contribute an extra $6,000 per year to your 401(k) or 403(b) plan in excess of the standard $18,000, and an additional $1,000 to the standard $5,500 for your traditional and Roth IRAs. If you can count on a 7% return and you can max out your contributions for about five years, that would funnel $179,000 into your savings.

If you’re still a few years shy of retirement and haven’t already done so, allocate a certain amount of money from each paycheck to go into a corporate 401(k) or another type of retirement fund. If you’re self-employed, do this with a financial advisor’s guidance.

Finally, if you’ve already retired from a full-time, 40-hour-week job, consider working past 65. You can take on a part-time gig that you’re excited about to stretch those retirement dollars – maybe you turn your career knowledge into being an adjunct professor at a local college.

Took too many risks

The situation: "I was too aggressive with my stocks." Lots of people take the rising equity glide approach, where they’re more conservative in early retirement and then increase their exposure as they age: That can work in some cases, and not in others – depending on the market. “Unfortunately, nothing will recover your lost money, and it’ll take a long time of straight gains in the market to fully recover any losses,” Clarkson says. What to do: You do have alternate options, though. “If you feel that the stock market is too risky for you, pull out completely and invest that money in an annuity product that guarantees growth with downside protection,” Clarkson says. If you need to be aggressively invested to fund your lifestyle, you may need to keep working – truthfully, you can’t expect the stock market to provide a fully bulletproof retirement income.

“Depending on your situation, you can also take what’s left of your account and switch to a less-aggressive portfolio,” Clarkson says. You can reduce your stock exposure, for example, by moving your money into bonds – which can be somewhat of a safety net.

Here’s another way to look at it: “I suggest you switch gears and be equally aggressive by investing in traditional, Roth or rollover IRAs with guidance from a financial advisor,” says Chad Montgomery, a California-based college math professor with a background as a predictions analyst and financial manager.

In general, many people really start thinking about retirement when they’re in their 40s and 50s. For example, if you’re in your 40s and want to retire in the next 10 years, you may need to be more aggressive in the market in the next decade to hit your goals – you’ll likely need to keep about 70% of your portfolio in stocks, as well as save a lot of money. In your 50s, keep about 50% to 70% of your funds in stocks.

In your 60s and 70s, about 40% to 60% of your investments should be in stocks – ideally, a retiree will allocate five to 10 years of living expenses in more conservative options like cash and bonds.

I retired too early

The situation: "I took Social Security too early." This is a pretty common scenario – and Social Security does comprise a large portion of many retirees’ income. People often make the problem worse by retiring too early and then electing to collect Social Security as soon as they’re eligible at age 62. Delaying Social Security as long as possible usually results in the best financial outcomes, financial experts say. What to do: You can claim Social Security benefits at any point in time between ages 62 and 70 – the average age people take Social Security, though, is 66, around when they retired. What you need to know, though, is that the earlier you take Social Security, the more you reduce your monthly check. For example, if you took Social Security at age 63, you’d receive only 80% of the amount you’d receive at age 66.

Bottom line: Retiring too early and claiming your Social Security benefits can impact your income for the rest of your life. It’s important to know that you can rescind your benefits within 12 months of taking them, but you’re then required to pay back all the income you received, including any taxes withheld from your check. This is an option you should discuss with your financial advisor.

As for taking Social Security too early, you already took the hit on the early withdrawal penalties if taken before 65, Clarkson says, so there’s no real fix for that. “However, you can take the money you receive from Social Security and put it into a product that will help grow the funds,” he says.

 

 

However, you can take the money you receive from Social Security and put it into a product that will help grow the funds.

 

If you retired too early, you may want to consider looking for a way to return to the workforce, Clarkson says. “Otherwise, seek out a financial advisor to review all your sources of income and savings to see if there’s a strategy or products that can extend the life of your retirement,” he says. “If you took Social Security after age 65 and it was still too early for you, see if there are any strategies or products a financial advisor recommends.”

If you haven’t retired yet, just consider that delaying Social Security, 401(k), IRA or other investment withdrawals help grows your income across the board. That means, at a 7% return, $500,000 would garner you an additional $30,000 in just one year. “I’d continue working, only this time the money you received would go directly in an IRA account or some type of retirement investments account with the guidance of a financial advisor,” Montgomery says.

Bit off more than you can chew?

The situation: “I bought an expensive, 3,000-square-foot home (or a second home) in my 50s.”

Whether your longtime family home is a cash cow, or you splurged on a larger home or a second home closer to retirement, you may be looking at real estate that’s worth more than your retirement accounts. You might also be looking at spending up to 50% of your income – or post-retirement income – on your mortgage, real-estate taxes, home insurance, utilities, regular maintenance and repairs, further reducing your discretionary spending.

What to do: First, consider downsizing to a smaller home, if that’s an option. “You may be able to resell and try to recoup most of the money you spent on the larger or second home,” Clarkson says.

Of course, discuss your options with your family (in case you had plans to leave your kids your longtime home) and your financial advisor. Tip: Try to avoid refinancing or tapping into your home equity to invest.

If you own a second property you can’t easily resell, Montgomery suggests renting it out. “How drastically does this affect your debt-to-income ratio?” says Montgomery. “If it’s drastic, I’d encourage renting that property out to help cover expenses.” 

Tip: If you’re considering purchasing a home or second home, talk to your financial advisor who’s helped you map out your retirement financial plan about what you need to put down. Remember, it’s all individualized, whether you’d be best with a large mortgage, a small mortgage or no mortgage in retirement.

Dealing with unplanned medical expenses

The situation: "I had more medical expenses than I anticipated."

Again, you’re not alone. Not many people store away money for illnesses and injuries, Clarkson says, and long-term care insurance is extremely expensive. What to do: “Life insurance, if funded correctly, can help pay for some of the medical bills from the face amount of the policy, though,” he says. “It’s a nice living benefit that will pay your medical bills and grow cash value – and it’ll pay out to your family in case something bad happens to you.”

Clarkson recommends talking with your adult children to see if there’s an option for them to help fund long-term care policies for you. “Many children already do this, so it doesn’t hurt to ask,” he says. For reference, the national median cost for a home health aide was $4,099 per month in 2017, according to Genworth Financial.

Finally, if you haven't already, you may want to consider applying for disability benefits (if applicable).

Check local resources

It's a smart idea to proactively learn about and manage any chronic conditions you have – like arthritis or diabetes. Have a sit-down with your healthcare provider to determine what you can do now and going forward to perhaps avoid larger medical bills later on in retirement. You can also check out what free or low-cost resources you can score from community-based organizations or senior centers – many will offer programs to help people manage diabetes or weight issues, for example.

During this visit with your doctor, review your medications. Switching dosages or looking at options that might cost less or are covered by your prescription drug plan are smart ways to save money.

Prevent future injuries — and expenses

Make sure your living space is as injury- and fall-proof as possible. (More than one out of four older adults falls annually, the CDC reports.) Look for things like poor lighting, uneven flooring and places where you could add a handrail, for example. Then, make the repairs. Falls can be expensive.

Do what's right for you

Everyone’s retirement is an individualized experience that needs to be funded on a very personal level – that’s why talking to a financial advisor about your circumstances can do a lot to ease your mind immediately.

For more information:

Chad Montgomery

Independent Financial Solutions Inc