Could 2016 be the year you finally close your retirement gap?
That gap, as in the difference between the amount of money you should have saved for retirement and the amount you have actually saved, is dangerous as Americans live longer.
New data from Fidelity Investments indicates there are plenty of gaps in U.S. retirement savers' portfolios. According to the fund giant's most recent Retirement Savings Assessment, 55% of savers get a "Fair" or "Needs Attention" rating, meaning they may have to make significant sacrifices during retirement if they don't hike their savings rates.
Dave Boudreau, co-founder of ForUsAll, a San Francisco-based small business 401(k)-fund provider, says it's possible for American workers to close that retirement gap. "Overall, yes the retirement gap exists, but the upward numbers represent traction in the market," Boudreau says. He says the "convergence of three things" makes 2016 the year the retirement gap can close in a way Americans have been waiting for.
1. "The use of technology delivers better retirement plans into the hands of more people," he says. "In this case, technology evens the playing field by making retirement products cheaper and easier to deliver."
2. "Legislation on the table is moving the conversation about retirement savings forward," Boudreau notes. "We're no longer squabbling about how existing plans should be regulated. But instead, the government is attacking the retirement gap at it's core - by removing predatory practices by service providers and moving towards mandated participation from every working American."
3. "The market will swing in the consumer's favor," he concludes. "The media did an excellent job exposing the retirement gap in 2015, causing new players to enter the field and old players to re-evaluate how they do business. When this happens, the consumer wins by getting better-designed products and lower prices."
That's all well and good, but savers have to do their own part in closing any retirement gaps.
"Without question, the number one way to close a retirement savings gap is to put a relentless focus on making more money," says Rob Wilson, a Pittsburgh, Pa. financial planner with Wilson Insight, who works with professional athletes, entertainers and young executives. "You can only cut your budget so much. Real change comes from the other side of the income statement."
Wilson advises retirement savers to get a raise at their place of work; get a different, higher-paying job; get a second job; or start a business on the side that will allow for greater contributions to your retirement fund. "While there are some people with a spending problem, pro athletes in particular, the problem that most Americans face is not that they spend too much, it's that they earn too little," Wilson explains.
Closing the gap on retirement won't mean much if you don't address long-term medical care needs, while you're still working.
"Some studies have shown that 70% of people over 65 will require some kind of long-term care support in their lifetime," says Tom Riekse, Jr., principal at the national brokerage firm LTCI Partners. "It's something people don't like to think about. But if you suffer a stroke, cancer, Alzheimer's, you have long-term care costs beyond immediate health care bills. The average cost of a moderate home care claim is $50,000 and the average cost of a nursing home claim is $90,000."
This poses a very real threat to one's retirement plans and savings, he adds. "When many face these costs, their only recourse is to pull from their 401(k) or other retirement assets," he says.
Other industry professionals say using milestones is a great way to close the retirement gap. "New guidelines recommend that we should be saving money according to certain milestones," says Robert Baltzell, a financial planner with RLB Financial in Valencia, Calif. "The first milestone is when you hit age 30. There, you should have your annual salary saved in retirement account, like a 401(k). By age 35, you should have double your annual salary saved. The milestones keep building on each other - You should have eight times your salary by age 60. Then your ultimate goal is ten times your annual salary by age 67."
Baltzell recommends stashing away 10% to 15% of your salary into a 401(k) or IRA annually. "If that's not possible, make sure you are at least putting in enough to get the company match," he says. "Once you start saving, work your way up to that 15% by increasing your savings by 1% every year. Some retirement savings plans will allow you to automate increased contributions, so you don't even have to think about it. Another great idea is to increase your contributions with every raise you get. This way, you start saving the money before you get used to it and start spending it."
The real key to closing big retirement savings gaps is to have a plan, one ideally with four key elements, says Krzysztof 'Kris' Garlewicz, a financial planner with Market Financial Group Wealth Management in Chicago.
1st: Clearly outline aims/objectives of what one's future is to look like.
2nd: Put solid facts and figures to those aims/objectives.
3rd: Get help to identify the amount needed to get there.
4th: Regularly review/update your objectives/aims along with the amount needed to get there.
"Retirement has no meaning to it," Garlewicz says. "'Living in a new country every June for the rest of my life' is actionable and will create the pressures today needed to help that individual allocate, prioritize and save appropriately. Add in a little professional help and one can significantly increase their positive outcomes."
So don't let any gaps in your retirement savings plan go unchecked. Close them, and close them quickly by taking proactive steps today, to protect your retirement tomorrow.