NEW YORK (MainStreet) –- When enough financial advisors start saying the same thing at the same time, it's usually a good idea to listen -- especially when they're saying you have no idea what you're doing with your retirement.
Voya Financial's Retire Ready Index found that a subset of U.S. workers is all too willing to hand over the responsibility of their retirement planning to their employer. Among workers participating in an employer-sponsored retirement plan, 33% are saving only the amount their employer will match with their own contributions. About 20% couldn't even be bothered to figure out what that amount would be and saved an amount pre-determined by their employer. Just 17% contributed up to the maximum amount allowed by their employer's plan, while 29% said they used “some other method” to determine what they should contribute.
“With the grim outlook on the future of Social Security and pension plans becoming a thing of history, relying on your employer’s retirement plan to fund your golden years may just not be enough anymore,” says Thomas Walsh, an investment analyst with Palisades Hudson Financial Group in Atlanta. “Contributing to an employer plan such as a 401(k) is a great start for retirement saving, but the more you can save for the future, the better.”
Even that half-hearted approach to retirement is far more proactive than many American workers have been with their retirement planing. According to a recent study of 1,000 U.S. workers by financial services firm Edward Jones, 45% of non-retired U.S. workers aren't saving for retirement at all. Of that group, only 36% plan to do so in the future and almost 10% say they aren't planning to save for retirement at all. While 58% of respondents 18 to 34 years old have not yet started saving, 90% say they have or plan to start saving for retirement before they turn or turned 30. However, as a testament to the power of procrastination, 26% of 35- to 44-year-olds say they plan to start saving in their 40s.
"When it comes to retirement savings, there’s a big difference between planning to save and actually doing so," said Scott Thoma, principal and investment strategist for Edward Jones. "While intentions to save for retirement are legitimate, individuals tend to satisfy more immediate, short-term spending goals and push off their long-term saving goals. This behavior can be incredibly detrimental for individual investors, particularly as they enter the critical savings periods of their 30s and 40s when they have, and unfortunately waste, a tremendously valuable asset -- time."
This is not only a terrible approach to retirement planning, but it's one that has U.S. workers worrying themselves into some bad habits. When the U.K.-based deVere Group asked new clients between ages 50 and 65 what their top financial worry is, 52% said that they were concerned that they would have to “downsize” their lifestyles at some point in their retirement. Another 19% said the worried about having to work longer than they had planned to, while 15% feared not having enough funds to help children, grandchildren and/or elderly parents. In another survey, CreditCards.com found that 50% of U.S. workers between ages 50 and 65 actually lose sleep worrying about whether or not they've saved enough for retirement.
“Whatever situation you’re in, it’s never too late to start growing, maximizing and safeguarding your retirement income -- there are always things that can be done,” says Nigel Green, founder and chief executive of deVere Group. “But the time to act is now as the longer you put off planning for your retirement, the harder it becomes.”
Especially once children enter the equation. While 39% of singles told Edward Jones that they are not currently saving for retirement, that number ballooned to 51% of those in households of three or more. Along those lines, 58% of workers without children have already started saving for retirement, while just 49% of parents had done the same.
"Parents are recognizing the need to save earlier in order to account for additional costs, like education," said Thoma. "We cannot emphasize enough the importance of saving for retirement early and often – it leads to higher future income in retirement, with less stress and uncertainty while working to achieve those goals.”
Considering all the expenses retirees will be facing, you'd think there would be more urgency behind retirement planning. The Voya study found that 61% of workers were significantly concerned about their inability to pay for health care expenses in retirement. Meanwhile, 58% were also significantly concerned that they would end up with fewer Social Security benefits than expected. That's not great news, when 45% of retirees plan to rely on Social Security as a major source of their income in retirement and 66% of workers planned to start taking Social Security at age 66 or younger — well short of when full benefit payouts begin at age 70.
So what should retirees do to get a better start? Palisades Hudson's Walsh says employer-matching retirement programs are always helpful, with many matching up to 3% or 4% of each paycheck at 50% or even 100% of the contributed amount. Advisors call it free money, which is basically what a worker is getting. However, having a small amount taken out of your paycheck each month isn't the path to a comfortable retirement.
“As your salary increases, try to maintain the same standard of living while increasing your retirement plan contributions,” Walsh says. “Not only will the amount deducted from your paycheck escape income tax until retirement, the investments held in your account grow tax-free until the funds are later needed as well.”
Those additional tax savings also benefit from compounded growth over time -- basically reinvested earnings making you more money -- and can make a substantial difference in your future retirement income. However, if you've maxed out your employer's retirement plan and still need a place to save, there are other options.
“Participating in an employer retirement plan does not disqualify you from contributing to a traditional or Roth IRA,” Walsh says. “Tax-deductible IRA contributions will be subject to a reduced income phase-out, but even nondeductible contributions offer a tax-efficient means of growth compared to a brokerage account.”
The benefits of maintaining both employer and private retirement plans will only increase as you age. Many employer retirement plans allow those who have reached age 50 to make an additional bonus contribution, or a “catch-up contribution.” For example, a 401(k) plan allows participants age 50 and over to defer an extra $6,000 into their retirement account each year. However, this additional contribution has no effect on the amount you’re able to contribute to your personal IRA.
“In fact, if you qualify for an IRA contribution, you’re permitted a similar catch-up contribution of $1,000 for a total IRA contribution of $6,500,” Walsh says. “This can add a substantial amount to your retirement funds at a time most are envisioning what their golden years will look like.”
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.