Most people don't save enough to retire comfortably. Here are our latest tips. Everyone hopes to lead an active, independent, worry-free life in retirement. But achieving these dreams takes money, and one message comes across loud and clear in research studies and forums on retirement savings: Most Americans are NOT saving enough for their retirement.
Many authorities suggest that in your retirement years you need 70 to 80 percent of your pre-retirement income just to maintain your current lifestyle. But too many Americans, including large percentages of people in their 40s and 50s, have saved little or nothing for their retirement.
"Experts say that time is running out for many Baby Boomers who will soon reach retirement age," adds Don Blandin, president of the American Savings Education Council (ASEC), a Washington-based coalition of private- and public-sector institutions. "If they do not dramatically change their spending, saving, and investing habits, millions of Boomers will face financial hardships in what are supposed to be the best years of their lives."
The need for more retirement savings has been highlighted recently as stock market losses and lower yields on savings accounts have cut into many families' retirement programs. That's why we are offering this latest summary of tips to help you build and protect your nest egg.
1. Make saving for retirement a priority. Start by figuring out how much you need to set aside, perhaps by using one of the many interactive worksheets available on personal finance Web sites (one being the ASEC's "Ballpark Estimate"). Among the other steps you should consider: Contribute as much as you can to 401(k) savings programs at work and Individual Retirement Accounts (IRAs) through your bank or brokerage firm. Arrange for automatic, direct deposit of funds into 401(k)s and IRAs. Also, plan to increase your retirement savings with each pay raise.
The sooner you start saving for retirement, the more money you'll have because of the compounding of interest year after year. Sachie Tanaka, an FDIC community affairs specialist, provides this example: Two people want to have $1 million in retirement savings by age 60. One starts saving at age 20, the other at age 40. Assuming a five-percent interest rate that's compounded daily, the 20 year-old needs to set aside $651 a month to reach the million-dollar goal, but the 40 year-old must do a lot of catching up by saving about $2,422 each month.
2. Diversify among a mix of investments. The news media has been filled recently with stories about thousands of Enron employees who loaded their 401(k) retirement accounts with the company's stock and then saw their savings disintegrate when Enron filed for bankruptcy and the stock's value plummeted.
Experts suggest a mix of investments and savings programs, typically including IRAs and Keogh accounts (for the self-employed); 401(k)s and pensions offered by employers; bank certificates of deposit (CDs); a good variety of stocks and bonds (individual or in mutual funds); and real estate.
If you're in your 20s or 30s, and depending on your tolerance for risk, you probably can afford to be moderately aggressive with your investments. If you're in your early 60s and close to retirement, you'll want to be more conservative, with more in CDs and bonds and less in stocks or stock mutual funds than you had in the past.
Also, make sure you have enough life, health and disability insurance, which are investments that can protect your family's finances from a major setback.
3. Take advantage of the tax breaks. Try to contribute all you can to 401(k)s because the earnings are tax-deferred, certain contributions may reduce your taxable income, and many employers even add money to your account as an extra incentive. Also, the Economic Growth and Tax Relief Reconciliation Act of 2001 includes special incentives for putting more money into
IRAs, 401(k) plans and other retirement programs. For example, contribution limits for traditional IRAs and the relatively new Roth IRAs (where the earnings may be tax-free) are rising from $2,000 last year to $3,000 this year, $4,000 in 2005, and $5,000 in 2008.
4. Give your retirement accounts a periodic checkup. Monitor your retirement accounts at least once or twice a year. Perhaps you'll want to "rebalance" your portfolio if, because of market fluctuations, your holdings have become too heavy or too light in a certain type of investment. Or, maybe you'll decide to increase your retirement contributions if the accounts aren't growing as you expected.
Review your "Personal Earnings and Benefit Statement" from the Social Security Administration, which is mailed automatically each year to current and former workers aged 25 or older and is otherwise available upon request. The statement shows your lifetime earnings and an estimate of your Social Security benefits. Among the things to look for: possible mistakes in your earnings report that can reduce your retirement benefits in the future. Also, contact current and former employers about your pension benefits and try to resolve any problems as soon as possible.
5. Plan a strategy for when and how to tap your retirement funds. It's important to know when you are eligible to withdraw from retirement savings and collect Social Security benefits, how much you can withdraw and collect, and the tax implications. This kind of information can help you make smart decisions about such matters as where to put most of your retirement savings and when you can expect to retire.
For example, new IRS rules substantially reduce the minimum amount you must withdraw each year from a traditional IRA, 401(k) and certain other retirement savings plans after age 70 ½. That's a money-saving change for many consumers because it means you can keep more money growing longer tax-deferred, says FDIC tax specialist Rick Cywinski. But he also notes that, because some people don't take as much from their retirement savings as the law requires, the IRS has adopted new procedures to more closely monitor retirement account distributions each year. That's also important, Cywinski says, "because the penalty for not taking minimum withdrawals after age 70 ½ is huge—50 percent of what you were supposed to take out but didn't."
6. Professional financial advisors can be helpful, but choose one carefully. Many professionals (perhaps even your banker, broker, accountant or insurance agent) call themselves "financial planners" even though their qualifications and services may differ significantly. Start your search by asking family or friends to recommend a reliable professional. "Try to find someone knowledgeable and reputable—someone who will take the time to make recommendations that are suitable for your needs," says Ed Silberhorn, an FDIC consumer affairs specialist.
The Securities and Exchange Commission also says that
before you hire any financial professional, you should know what services you're paying for, how much those services cost, and how the advisor or planner gets paid. Example: Some financial planners only charge for their advice—they do not get paid more if you purchase the financial products they recommend. Other financial planners, though, may earn commissions if you purchase products they suggest.
Try to interview more than one planner and ask for a written description of the services offered. And, independently check the credentials and reputation of a prospective investment advisor. A good place to begin is your state government's consumer protection office or state Attorney General's office, as listed in your phone book.
7. Know if your retirement deposits are fully insured by the FDIC. You don't have to worry if you have less than $100,000 in retirement funds at the same bank—it is all federally insured. But if you've got more than $100,000 in retirement accounts at the same bank, some of your money may be uninsured.
In general, your IRAs and any other "self-directed" retirement deposits at the same FDIC-insured institution are added together and insured up to $100,000. (Self-directed means that you, not your employer, decide where to place the money.) IRAs and other self-directed retirement funds, however, are insured separately from other types of deposits you have at the same institution, including pension funds deposited by your employer (and not self-directed). For more information, check www.fdic.gov or contact the FDIC at the addresses and phone numbers on our "For More Information" page.
