Tips on Retirement Savings for Late Starters
According to a recent article in CNN’s Money Magazine the top New Year’s resolution this year is to save more money. Their survey says 37 percent of Americans are planning to make a financial change as their New Year's resolution for 2007; compared with just 23% in previous years. According to another recent article on PR Newswire this is great news since only 13% of 55-64-year-olds in the U.S. have enough money to live 30+ years. Saving for retirement is the number one New Year’s resolution people should make. If you're one of millions of Americans who are on the other side of 40 and don't yet have a substantial retirement nest egg, don't despair. It's not too late, but time is of the essence. Here are some top tips for late starters to boost their retirement savings:
1. Get in the Ballpark - Estimate roughly how much money you'll need to live on in retirement. Don't get bogged down by conflicting advice on how to calculate the amount. A ballpark figure is a good starting place, and you can use one of a number of good online retirement calculators to get an estimate.
2. Calculate It - Once you have an idea of how much you'll need for retirement, calculate what will be available from sources other than your savings. For example, what is your expected Social Security benefit at retirement age? Do you or your spouse have a pension from a previous or current employer? If you have a 401(k) plan, what is its expected value at your planned retirement age? Use a conservative rate of growth to avoid overestimating.
3. Set Goals – Set goals for reaching the amount you'll need to make up the difference between Social Security, pensions, and any other retirement funds you already have.
4. Make A Contribution - If your employer has a 401(k) or 403(b) or other voluntary contribution retirement plan, and you're not already participating, sign up today and try to contribute the maximum allowed by law. Remember that the tax savings on your deductions will soften the blow. If you're in a combined federal and state income tax bracket of 35%, your contributions will only cost you 65 cents for every dollar you put into your account. The maximum contribution for 2006 is $15,000 for those under 50 years old and $20,000 for those over 50. If your employer matches a percentage of your contribution, that's free money you should never pass up.
5. Go for the Roth - If you make under the income thresholds, you can contribute to a Roth IRA in addition to your 401(k) or 403(b) plan. The contribution is not tax deductible, but the earnings will be tax-free in retirement. The maximum contribution for a Roth IRA in 2006 if you're under 50 years old is $4,000 ($5,000 if you're over 50). $4,000 a year will grow to nearly $208,000 in 21 years at a 7% rate of return, and you will owe no taxes on any earnings in your Roth IRA.
6. Don't Be Too Conservative - Even at 45 or 50 years old, you have several decades for your retirement earnings to grow, so invest a large percentage in carefully researched, proven stocks, or better yet, mutual funds.
7. Consider Relocating or Downsizing - If you live in an area with a high cost of living, moving to a less expensive area and investing your savings for retirement could make a big difference in your ability to amass a nice nest egg.
8. Work it Off - If you're worried about ever being able to amass enough money to retire, consider taking on a second job and investing your earnings.
9. Get out of Debt - If you carry thousands of dollars of credit card balances and pay the minimum payments each month, your potential retirement savings is going directly to your credit card company in the form of interest. Paying only the minimum payment on credit cards is one of the worst financial mistakes you can make. Start applying as much as possible to your credit card balances and once they're paid off, resolve to pay the balance in full each month. You'll be amazed at how much money it frees up for retirement savings over time.
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