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According to a recent survey of CPAs, the top three financial fears for people heading into retirement are: running out of money, being able to maintain your lifestyle and rising health care costs.
All of these get tougher as we live longer and longer, and despite a small decline in longevity rates this year, the trend has been, very steadily, up. That’s why we’re kicking off this year’s #StartTODAY series with some important ways to help you stretch your finances.
Here’s what you need to do:
1. Take stock.
The only way you’re going to know how far you’ll be able to stretch your dollars is to get an accurate assessment of what you have. According to research from Fidelity Investments, your aim should be to have 10x your annual salary saved by the time you retire but these are the benchmarks to hit.
At age 30: 1x your salary
At age 40: 3x your salary
At age 50: 6x your salary
At age 60: 8x your salary
At retirement: 10x
For people who are earning between $50,000 a year and $300,000 a year, this amount of savings, combined with Social Security (more on that in a moment) will do it. And consistently saving 15 percent, including employer matching dollars, will generally get you there. but if you’re behind the benchmarks you’re going to need to try to ratchet that up to 20 percent to get you in the swing of things.
2. Make big changes.
A lot of people are going to look at those numbers and say: I am not even close. What do you do then?
This is not a problem you can solve by skipping coffee (although if you quit coffee and bottled water and lottery tickets and other daily budget busters you may be able to make a significant dent).
Instead, you need to look at making bigger, broader changes in your life. The biggest line items to look at:
Housing: Downsizing early can save you not only in mortgage payments or rent, but taxes, insurance, maintenance, utilities.
Transportation: Can you go from being a two-car family to a one-car family? Or, can you pay off your current car and then continue to drive it as long as possible?
Credit card and other interest: Interest rates are going up. Have you lowered your interest rates as far as you can by refinancing and transferring balances? Paying off your credit card debt (if you’re average) can free up a few thousand dollars a year to save.
3. Work longer.
If you were planning to retire, consider putting it off for several years. This gives you additional time to earn money toward your savings — plus it puts off the point at which you had to start withdrawing money from retirement accounts and taking social security. Continuing to work also has health benefits (we’ll talk about that later in the series.)
4. Build a secure retirement paycheck.
Once you’ve got your numbers moving in the right direction, you want to shore up your lifetime income. The idea is to use your resources to insure that you have a comfortable life with all of the fixed expenses covered for as long as you live. There are three building blocks in this equation.
Building block 1: Social Security.
You want to aim to maximize your take from Social Security. Working longer will allow you to put off taking Social Security, which from age 62 to 70 can increase your payouts by 8 percent a year. You have to live until age 80 for the math on waiting to make sense. But most people will these days.
Building block 2: An Fixed Annuity.
What’s the gap between Social Security and your fixed expenses (mortgage, transportation rent, food, utilities, health care premiums?)
Consider converting a portion of your nest egg into a fixed, immediate or deferred annuity that will cover the gap. Essentially, you’re using part of your nest egg to buy a paycheck that can be structured to last as long as you (and perhaps your spouse) live. You can do this from within a 401(k) or IRA using something called a Qualified Life Annuity Contract or QLAC. You buy it when you’re 50 or 60 with the intent of turning on the payments down the road.
The benefit is that the money you put into a QLAC doesn’t count toward the minimum distributions you have to take from your retirement accounts, so you’re not taxed on it.
Building block 3: Your retirement account, continually invested. Whatever’s left in your retirement account can be withdrawn at a rate of about 4 percent a year (that’s 4 percent of the balance computed each year, not 4 percent when you start). In down markets, you’d take closer to 3.5 percent, in up markets you can take closer to 4.5 percent. The money still in the account needs to stay invested even after retirement because you need it to keep growing.
At age 65, you still have a long time horizon because of how long you’re going to live.