Ten Tips for Late Starters
To Boost Their Retirement Savings
From Deborah Fowles
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.
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.
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.
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. 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 2005 is $14,000 for those under 50 years old and $18,000
for those over 50. If you're currently 45, you have 22 years
until retirement. Your $14,000 a year contribution will grow
to nearly three quarters of a million dollars (pre-tax) in 22
years at a seven percent rate of return.
If your employer matches a percentage of your contribution,
that's free money you should never pass up. Add your employer
match to your own retirement contributions and you'll have a
tidy additional sum of approximately $364,000, assuming a 50%
employer match, for a total of well over one million dollars.
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 2005 if you're under 50 years old is $4,000 ($4,500
if you're over 50). $4,000 a year will grow to over $208,000
in 22 years at a 7% rate of return, and you will owe no taxes
on any earnings in your Roth IRA. 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.
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. If your kids have left the
nest and you're still living in a big house that has appreciated
in value, consider selling it and buying a smaller, less expensive
home. You'll save not only on your mortgage payment, but in
less obvious places like the cost of heating, cooling, insuring,
and repairing your home, property taxes, etc. You can sock all
the savings away for retirement or use some of them to enjoy
your life now.
If you're worried about ever being able to amass enough money
to retire, consider taking on a second job and investing your
earnings. Play catchup. The tax laws now allow those over 50
to contribute a little extra to 401(k)-type retirement plans
and IRAs, so they can do a little catching up as they near retirement
age. Take advantage of this if you're over 50.
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. The older you
are when you start seriously saving for retirement, the harder
you'll have to work at it, but it can be done by following the
advice above, so don't let doubt or discouragement keep you
from starting right away, regardless of your age.