By Beth Henary Watson
Because they haven’t saved enough for their futures, many Americans are slowly impoverishing themselves. In my financial planner mind, it’s like the fabled frog that doesn’t realize it’s slowly being boiled.
Typical articles on how to catch up on retirement savings tell you to max out your 401(k) and IRAs. I have concerns about how realistic this is. People who are behind aren’t accustomed to saving that much, let alone the $2,750 a month per person it takes to top off those accounts!1
So, how do you know if you’re in hot water?
Let’s say my husband and I are both 50 years old.2 Our gross income is $110,000 and we spend $6,500 a month. Respected rules of thumb agree we should have north of $650,000 saved for retirement.3 The older you are, or the more you spend, the higher the recommended amount.
Do not be discouraged if you aren’t there.
What follows are an assortment of techniques I could use if I found myself behind on retirement savings. These suggestions may seem radical, but please realize that bigger actions can help accelerate progress. You have a lot of ground to make up. Smaller steps like switching from name brand green beans to generic will yield less impressive results.
(Confronting the reality that you need to play catch up in your 50s or 60s might be frightening. I continue to use myself and my husband as the characters to lessen the chance you feel this is personal.)
1) I could get rid of my car payment or downgrade my vehicle. According to CreditKarma.com, the average vehicle payment is $400-$568, depending on whether it is new or used. Bigger, fancier vehicles boast luxury price tags.
Strategize how you can lessen this burden. Ideally, eliminate the payment altogether. If you were to invest your old $400 car payment and earn 6 percent on that money, you would have over $115,000 in 15 years.
If you have a car payment, your vehicle is burning money along with fuel. Consider a change.
2) I could lower my housing costs. As a typical American family, our house is bigger than empty nesters might want--it’s already more than we need. Once the kids leave we could decide we don’t need 1,000 square feet per person.
If I sell my house and downsize when my last child graduates high school, I will be 56 years old. Potentially, we could capture our equity and any appreciation in the sale, and rent or buy a smaller home.
For me this is an option because my home is not an ancestral property. My attachment won’t be so great that I wouldn’t move if I needed to reduce my taxes and maintenance costs.
Using the 6 percent return assumption, lowering my housing expenses by $500 a month and investing the difference from ages 56 to 65 gives me more than $70,000. It’s also a possibility to invest some of the sale proceeds for long-term growth potential, depending on your age and situation.
Here at Corner Post we’ve seen a few clients make “right-sizing” housing decisions that we think will help stretch their retirement nest eggs.
3) I could curtail “Economic Outpatient Care.” General financial planning advice opposes giving money to able-bodied adult children at the expense of your own future.
We all want our kids to succeed, but they needn’t be a cost center forever! Dr. Thomas Stanley, author of The Millionaire Next Door, calls financially supporting adult children “economic outpatient care.” His and subsequent research indicates that it isn’t good for the giver or the recipient.
My husband and I need to be really careful because your 50s tend to be your highest earning years (the retirement “catch-up” decade), but our last kid doesn’t start college until we turn 56.
A retirement plan withdrawal or loan to pay for college should be out of the question. On the bright side, retirement assets are not counted as parental assets on the federal financial aid application, though other profiles may pick them up. Contributing to retirement accounts in the years prior to and during college could help the family all the way around!
It hurts my Mom Heart to type this, but deferring $1,000 a month to your retirement account instead of providing “adult child support” over 6 years will grow to over $85,000 at 6 percent returns.
Final thoughts. By trimming some expenses between the ages of 50 and 65, in this hypothetical example I have diverted another $270,000 toward my retirement security. It isn’t a mint, but it improves my personal outcome.
My goal with this case study was to offer actionable suggestions that will move the needle for those who find themselves behind on retirement savings. None of them are easy.
I haven’t mentioned growing your career. That also may be a possibility, and I encourage it. But in my experience recurring expenses are the critical number in a retirement plan. What passes for a middle class lifestyle these days requires significant savings or other income flows to maintain. I’m concerned many people will not be able to keep their standard of living as they age because it’s been a little too high all along.
Beth Henary Watson is a CERTIFIED FINANCIAL PLANNERTM at Corner Post Financial Planning.
Notes:
- Maximum 2021 contribution for a worker age 50: $26,000 in 401(k) and $7,000 in an IRA.
- Scenario is fictitious. This is a hypothetical example and is not representative of any specific investment. Your results may vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
- Fidelity Investments benchmark is 6x salary by age 50. Marotta Wealth Management rule of thumb is 9x annual spending by age 51.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.