Can We Retire?

Ask most 50-year olds if they think they’ve saved enough for retirement and you will usually get a quick and emphatic – No Way! Their reasons are always the same – there just wasn’t enough left over to save. The individual reasons run the gamut from educating the kids, high healthcare costs, more fun to travel and eat out, expensive divorce, investment loss, or simply never getting around to it.

If you feel that you haven’t saved enough for retirement, you are certainly not alone. According to a BlackRock study featured on the Motley Fool website, “the average pre-retirement baby boomer (defined as 55-65 years old) has $136,200 saved for retirement. Including additional savings and the effects of compound growth between now and retirement, this should translate into $9,129 in annual retirement income.”

The good news . . . it is not too late, but it will take a plan, intentionality, and commitment, especially if procrastination played a large part in landing you in your current fix. More good news is that you are making more money than you were years ago and the government has made it easier to save more. Today’s ‘catch-up’ provisions allow you to set aside more of your higher earnings than ever before. Once you turn 50, you can boost your pre-tax IRA or post-tax Roth contributions from $5,500 to $6,500 and 401(k) contributions from $18,500 to $24,500.

Or course, contributing more to your savings means spending less on other things, in many cases things that are more fun than saving. Quite simply, retirement-savings catch-up comes down to figuring out how much more you need to save now to accomplish important future goals and then determining how much and which current spending you are willing to divert into that savings. By thoughtfully re-directing the lowest-priority spending, spending that is not seen as important to current lifestyle, faithfulness to the plan is improved dramatically.

Let’s take a real-world example to demonstrate. John and Mary Late are both 52 years of age and have just graduated their second, and last child from college, debt-free. They are both gainfully employed making $75,000 in salary each, but would really like to retire by age 65 to travel and volunteer in their community. Until now, they have not been able to contribute more than $1,000 each year into their company 401(k)s in order to get the employer match. The current balance in each 401(k) is $25,000.

Now that the kids have finished college, the Late’s can divert toward savings the $20,000 in free cash flow that had been going to pay the kids’ college costs and tuition. They are advised to increase their 401(k) deferrals at work by $10,000 each per year to best accomplish their increased savings. There is no change in their lifestyle so far because they haven’t used that money for anything other than college for the past decade or so.

During the planning process, they find that increasing their 401(k) deferrals by $20,000 each year, saves them about $5,500 in taxes. They are advised to use this savings to pay an additional $500 per month on their mortgage, thereby paying it off by their retirement goal of 65.

Working with their financial advisor, the Late’s develop a financial plan that includes the elements mentioned so far, as well as fun activities like travel at $12000 per year until they turn 80 and $6,000 each year until turning 85. They can replace their cars four years sooner than they currently do while spending more on them than they have in the past. They were also encouraged to include $10,000 a year for unexpected expenses along the way. Their healthcare expenses under Medicare and Medicare supplements are included with considerably more predictability than their current medical expenses.

Another nice surprise for our 52-year old couple with limited savings was that they would not have to take undue stock market risk to meet their retirement goals. Stress-testing their plan with Monte Carlo, (statistical probability analysis tool) suggested minimum levels of risk that would be required to meet or exceed their goals giving them sufficient statistical confidence. The Monte Carlo helps to steer the advisor in making adjustments along the way required to react to misbehaving markets, life changes, and other uncertainties.

Social Security represents about half of the Late’s future planned income, so it calls for a careful analysis of when to start. Both John and Mary come from families with longevity. By evaluating all their options of when to start taking their benefits, the best option could be determined. It is generally the case that taking later is better as there it an 8% increase in benefits each year you wait, up to age 70, when you must start. However, in order for this strategy to work, you have to live long enough to make up for the years you did not take your benefits.

The Late’s decided to take their advisors’ advice, and take their benefits at age 70. By waiting, they would be spending earlier from their investments, which are less certain (more volatile) in comparison to the steady, and rising benefits of Social Security.

When the Late’s started their planning process, they were all but convinced retirement might be unachievable. Once their plan was presented and they learned that they could not only retire at their ideal age of 65 with confidence, but there were opportunities for them to boost spending among their highest priority goals or save less and spend more today. Turns out, ‘better Late than never’ applies to retirement planning as well.