Are you preparing for retirement? Are you afraid that you may not have saved enough to retire comfortably? Then there are some techniques that older readers can try to increase their overall savings. One is the obvious method of saving more, and the second is to be more aggressive in your investing plan. Most financial advisors will recommend that you have eight to ten times your annual salary saved prior to your retirement in order to retire comfortable. Of course, many factors can go into what each of you will need to save in order to retire in the manner that is suitable for you.
Now the longer you wait to start saving the more you will need to set aside to achieve your goals. If you are in your 20’s and are saving at least 10% of your salary for the first several years of your career, you will be much better off in the long run. That is because your money will earn a return over 40 plus years allowing the power of compounding to work in your favor. Someone who starts in their 30’s and has two times their annual salary saved will need to save about 10% of their annual salary to retire comfortable as well. Fast forward to someone in their 40’s with the same two times their annual salary saved will need to save 16% or more of their salary to achieve the same results. The power of time and compounding is the most powerful tool in your retirement savings arsenal. And worst off if you are in your 50’s and only have two times your annual salary saved you will need to save almost 30% of your salary to achieve your retirement goals.
But how much you need to save is an answer I am not able to give you at this time for many reasons. As a general rule, you need to save at least 10% of your salary before you add in any company matches on your 401(k). Once you factor in the company matching you need to be saving between 12% and 15% starting out in your career. If you do this, chances are you will be comfortable in your retirement. The later you wait to start the higher the percentage will be that you need to save in order to retire comfortably. Now there are other factors that will need to be considered when deciding how much is enough to save. Some of them are your personal health and any health related issues you may have or think you may experience in the future. Knowing your family’s health history comes in handy here and can assist you in your planning. Also, if you come from a family that has a history of longevity you will need to consider that when saving as chances are you will need to save more to make up for your longer life. And with a longer life comes the increased chances that some form of long-term care may be needed so that must be considered as well either through additional savings or an insurance policy.
As for how much you are allowed to save that is dependent on your age. For 401(k) accounts in 2014 workers under the age of 50 may save $17,500 and those over age 50 are allowed a catch-up contribution of $5,500 for a total of $23,000 that can be saved. If you are also saving in an IRA as well, savers under the age of 50 can save $5,500 in 2014. For those savers over the age of 50, they may contribute an additional $1,000 in catchup contributions for a total of $6,500.
Now if you are an older worker and you need to save extra in addition to saving more you may also want to consider investing more aggressively. While many people tend to shift from equities to bonds as they near retirement I, along with many other advisors, find a fatal error in this strategy. As people are living longer in their retirement years, they still have a need to not only preserve their capital but in many instances they still need capital appreciation. Only you can decide what you are comfortable with as far as your investing plan but consider that more exposure to equities does increase your portfolio’s return and in many cases does not increase the portfolio’s risk as much as you think. History, while not a prediction of the future, does give us a good idea of how the markets may perform in future years. Yes, equities are much more volatile than bonds, but the rewards far outweigh the rewards of bonds at this time. If you want to know how volatile your portfolio is or how volatile it could be if you were to change the asset allocation consult a financial advisor for more information.
So for savers who are over the age of 50 and either think that they have not saved enough or know that they have not there is hope for you still. One is you must invest or save more of your annual income in order to catch up with your overall portfolio value. And secondly you may have to re-evaluate your investing plan and consider becoming more aggressive in your investment choices. While more volatile equities will return more than bonds and if done the risks properly can be mitigated to a great extent.
If you need more information or want more information on this topic feel free to contact me.