How Can I Get On Track for Retirement?
According to a survey done by GoBankingRates in 2015, 1 in 3 Americans had nothing saved for retirement. And, only 26% had saved over $100,000 for retirement. Even more alarmingly, 28% of people over age 55 still had no retirement savings!1
In my experience, I’ve found that many people want to get on track for retirement, but don’t take action because they feel overwhelmed, uneducated, or they think they’ll never be able to get on track, so they do nothing.
However, there are a few simple changes that, if made, could end up having a significant impact on your long-term retirement plan.
1. Start Saving Early
Saving early will help you take advantage of compounding interest, something Albert Einstein called the 8th wonder of the world. In fact, let’s look at a practical example of compounding interest and just how powerful it can be.
First, let’s look at Mary, who is 25 years old. Let’s say Mary saves $10,000 annually, starting at age 25, and she does this for 10 years. After 10 years of saving, Mary never saves another dime toward her retirement.
Then, we have John, who is 35 years old and has not saved anything up to this point. But, John decides to get started now and saves $10,000 each year from age 35 until he retires.
Let’s finally assume that both Mary and John retire at age 65 and both earn an annual rate of return of 7%. By age 65 Mary would have contributed $100,000 out of her pocket and her retirement account would be worth over $1.1 Million (again, assuming a 7% annual return2).
Shockingly, John would have contributed $300,000 to his retirement account, and at 7% annual return, his portfolio would only be worth a little over $1 Million at age 65, even after contributing triple the amount that Mary did!
How can this be? The answer is compound interest and time.
2. The 1% Annual Increase
If you’re older than 25, the good news is that there are plenty of other strategies you can implement to help get you on the right track, including the 1% annual increase.
For many employees, it may be difficult to drastically increase your retirement contributions all at one time. However, increasing gradually over time by just 1% per year can make a big difference down the road.
Many retirement plan providers even allow you to select an automatic 1% increase in contributions each year for a specified amount of time. This way, your increase in savings isn’t something you have to remember to do. You can even coincide your contribution increase with the time you typically receive an annual pay raise. Furthermore, if you are accustomed to an annual 3% raise, increasing your contributions by 1% would still allow you to see a partial increase in take-home pay, while also helping you get on track for retirement.
This impact of this strategy increases with more time and works best for those in the initial stages of their career. However, the 1% annual increase strategy can also make a significant difference for you if you’re well into your career. And, if you need to make up for lost time, you could even increase your contributions by 2% or 3% in some years.
3. Get Your Allocation Right
Just like a 1% increase in contributions can make a significant difference, so can a 1% difference in average return. Today, many people have the bulk of their retirement savings in a 401(k) or other type of employer-sponsored retirement plan. And, many employees are not properly educated by their 401(k) provider and they do not receive help with choosing a proper allocation.
The most common mistakes we see are people that are invested too conservatively, have too much concentration in one fund or stock, or are trying to time the market.
While investors should certainly evaluate their own tolerance for risk and volatility, they should also evaluate things like time horizon and anticipated income sources at retirement. Some younger investors ignore the latter and instead focus only on the emotional side of investing, opting for conservative offerings at a young age.
Regardless of where the allocation errors lie, the result is that even a small decrease in average return over time can significantly impact the portfolio. A good retirement plan advisor should help educate and put you in a position to earn as much as possible, while also meeting any short or mid-term withdrawal considerations.
One type of fund that essentially tries to do this for you is a target date fund. Target date funds are a good option for investors who do not know how to build a portfolio from scratch.
4. The Power of Working One More Year
The impact of working an additional year varies by each individual, but is usually a major factor in the likelihood of retirement success. And, it’s easy to understand why!
Each additional year you work is one less year you’ll need to provide your own income during retirement, allowing you to delay withdrawals from your portfolio. It’s also one more year you can delay Social Security, allowing your Social Security Retirement benefit to increase by 6-8% depending on your retirement age. And lastly, it’s one more year you will hopefully be saving into your retirement account.
For example, let’s say Bob saves $25,000 per year to his retirement plan during his working years and plans to withdraw $50,000/year for living expenses once retired. By working one more year, Bob could create a $75,000 swing in his favor just in year one, not even including the increase in Social Security that he would receive for delaying his benefits.
Getting on track toward retirement success can seem daunting and overwhelming. But, these are just four examples of relatively small changes that can help you move your retirement plan in the right direction. The key is to get help and get started.
1GoBankingRates Survey; http://money.com/money/4258451/retirement-savings-survey/
2This illustration is for educational purposes only. Market returns are historically not level over time. Readers should not assume a 7% annual rate of return for their own projections. This is not intended as personal advice for retirement planning or investment planning.
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