Guest view: A no-panic guide to 'late to the game' retirement savings
Different stages of life have their own unique challenges and distractions for our retirement savings.
The typical issues for most investors in their 40s are:
- Dealing with competing interests, which are most typically funding retirement and educating children.
- Creating a unified and coordinated strategy to meet these goals simultaneously.
Don’t let yourself get distracted and/or overwhelmed. Let’s walk through what you need to know.
The linchpin is creating a detailed financial plan that will quantify where you currently are in relationship to your goals (how much you have saved currently versus how much you need to retire) and what needs to be done in order to get there (to meet that goal, you must save X per month). If the savings rate needed to reach your goals is not realistic today, a plan of action for building to that rate needs to be created or the goals need to be reevaluated.
Some common themes across prioritizing your goals or your next steps are:
- creating an emergency fund (or cash reserves)
- addressing debt issues
- capturing "free money" from 401(k) matching
- incorporating Roth IRAs and/or after-tax savings as appropriate
How to get started when it's already late in the game
In almost every situation there is the opportunity for some level of investing towards retirement (no matter how small) and the most important thing is to start the habit of regularly investing. The decision to forgo that investment typically revolves around the concept that saving money is not fun; however, the actions required to make up for the missed opportunity are not fun either – most notably, taking on more risk than you might otherwise be comfortable with, more drastically cutting your current cost of living or delaying your retirement in an attempt to catch up.
Creative ways to start saving if you work in an office
The most important decision is to be certain that you are capturing all of the ‘free-money’ provided by an employer’s matching. Matched contributions will typically provide a return that cannot be matched by the stock market. Beyond that you can evaluate if your company’s retirement plan is the most appropriate vehicle for you to use.
Creative ways to save if you work for yourself or a small employer
If you own your own company, and have good cash flow, there are numerous strategies with retirement plan design that can tilt the amount of company dollars allocated to your account. The specifics of your situation will dictate what is available, but things like your age and income relative to the rest of the company will be factors.
Potential problems to consider
In addition to overcompensating for the late start by loading up on risk, you can become your own biggest problem by not facing the reality of your situation or, as noted above, rationalizing why you don’t have the magnitude of an issue that you really do. A primary benefit of an independent adviser is to hold you accountable to the reality of your situation.
What types of tax deferred and non-tax deferred accounts are useful?
Depending on current income levels relative to anticipated future income levels, Roth accounts (IRAs or 401(k)s) can be extremely attractive. If it makes sense to give up the upfront tax savings of a traditional IRA or 401(k), the long-term tax benefits are significant. At this point, most 401(k) plans will offer a Roth option.
Dealing with youthful indiscretions
Learn from your past mistakes and apply those lessons to your current circumstance. In your 20s did an excessive portion of disposable income go into something that did not create long-term value (like your wardrobe)? Reallocate these funds to your retirement savings.
Relying on generic retirement calculators
Rules of thumb can be dangerous and the results of online calculators are only as good as the quality of the inputs – paying independent advisers for their expertise in setting realistic assumptions/parameters is the best method. Overlooking critical data points, concepts or themes can be disastrous, and utilizing unrealistic assumptions for things like return, inflation or taxation will lead to erroneous results that may provide a false sense of security.
Bradley Newman is a certified financial planner with Roof Advisory Group Inc. an independent registered investment advisory firm in Harrisburg. He can be reached at firstname.lastname@example.org.