Editors' pick: Originally published Jan. 5.
One of your top financial resolutions for 2017 is to get serious about your retirement. If only you knew how to do so.
According to an end-of-the-year survey by Capital One Investing, more than one-third (32%) of investors will dedicate at least one of their New Year's resolutions to personal finance, up from 27% in 2015. Though the top goal is creating an emergency fund (24%) which we've discussed in depth this year -- a whole lot of you want to invest more in retirement savings (23%) and getting smarter about investing (23%). More than one-third of investors will increase contributions to their retirement plan, with 83% reporting they have access to a plan (up from 75% last year).
However, Prudential Investments found that although 80% of people they surveyed before the end of the year considered retirement their priority, the average grade they give themselves for the retirement preparation is a "C." A very honest 12% give themselves a failing grade.
"Understanding the hurdles keeping people from a secure financial future is critical to helping them meet their goals," says Stuart Parker, president of Prudential Investments. "This research reinforces the need for people to seek advice and the need for the investment community to give advisors the best tools and solutions available."
So what are the key issues that are keeping you from sticking to your retirement resolutions? Well, 63% of you find investing complex and confusing, 66% think it's harder to invest now than it was during your parents' generation and 64% of you are overwhelmed by the number of available choices. Roughly 42% of you don't know how your assets are allocated once you do invest, and 43% of you don't know what it is you're investing in.
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But don't worry: you're far from alone. A whopping 74% of you think you should be doing more to prepare for retirement, while 40% don't know what to do to prepare. Though 24% of workers think they'll need $1 million or more to retire, 54% have less than $150,000 saved in employer-sponsored plans. It doesn't help that 20% of workers don't believe they'll ever be able to retire, while 35% say they'll never be able to save enough, so it doesn't matter when they start saving. That kind of retirement nihilism is leading to all sorts of bad decisions, with 57% of Americans saying they would use savings to cover a financial emergency.
That's not helpful when 51% of all retirees retired earlier than expected, with 50% retiring five or more years earlier than expected. If you're among the 2% of that group who retired early, because they were tired of working, congratulations. However, if you're among the 52% who retired because of your health problems or those of a loved one or the 30% who were either laid off or bought out, it can be scary out there. Among those of you who haven't retired he, 57% say health care costs could bite into retirement savings, another 57% say changes to Social Security might alter their plans and 45% say the potential for dealing with an illness or disability has them worried about their savings.
None of that has scared you into saving, though. 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 also 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 they 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? Well, Thomas Walsh, an investment analyst with Palisades Hudson in Atlanta, 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."
But what targets are you aiming for? That can be a little tougher to discern. According to the advisors at T. Rowe Price, saving 15% of your earnings -- including employer contributions -- starting at age 30 can earn you upwards of $1.7 million by the time you retire. Now, that assumes 7% annual returns on your investments, a $50,000 salary at age 30, a 3% annual salary increase, a 4% annual withdrawal rate beginning at age 65 and 3% annual inflation. It also assumes that you wouldn't forfeit about $570,000 by saving just 10% a year.
But what if you aren't that young and haven't really put away a whole lot for retirement. Don't worry. For folks who begin socking away 15% at age 45, that still adds up to $457,000 based on those same variables. That's helpful, since a recent Google survey study conducted by GOBankingRates indicates that 33% of U.S. workers say they have no retirement savings. Another 23% who have less than $10,000 saved. According to GOBankingRates survey responses, J.P. Morgan Asset Management checkpoints and Census Bureau data on median incomes by age range, a 30-year-old making the median $54,243 should have about $16,273 saved. However, roughly 67% of workers that age are well behind that goal.
Considering that 75% of workers over 40 are behind on their retirement savings, according to GOBankingRates, they can use any help they can get. Even throwing 15% of income into to 401(k) and IRA accounts, paying down debt and using the catch-up provisions that allow for bigger contributions to retirement plans by people over 50 can help investors salvage their retirement. That's going to help the 58% of workers 18 to 34 who have not even started a retirement fund, which GOBankingRates and J.P. Morgan says should happen by age 24.
However, advisors at Voya Financial found last year that 74% of Americans have never calculated their monthly retirement income needs. Meanwhile, 51% of retirees have never tried to determine if their current savings will be enough to last through retirement - though 39% assume what they have will not last 20 years. A full 13% of current retirees don't know how much savings they have in the bank in the first place.
HSBC says that 72% of pre-retirees ages 45 and older would like to retire in the next five years; however, 37% won't hit that mark, largely (77%) because they don't have the cash to do so. DeVere Group, meanwhile, found that 78% of workers from all over the world underestimate how much they'll need to save for retirement.
"They know that saving for their retirement is now, without question, a personal responsibility for each and every one of us," says Nigel Green, chief executive of DeVere Group. "However, what is alarming is that the vast majority do not know just how much they will need to save. This black hole in the detail -- not knowing how much they will need in something as fundamental as funding their retirement -- is extremely concerning indeed."
There are other variables at play as well. HSBC found that 67% workers are unable to predict how much they are likely to spend on health care in retirement, including 63% of those living in households with an annual income over $79,999. UBS, which only surveys investors with at least $1 million in investable assets, found that only 50% in investors have factored healthcare costs into their overall financial plan, and only 23% have saved for their future care. About 88% of wealthy investors say factoring in health care costs is harder because people are living longer, while 76% note that the price of modern healthcare is significantly higher than it was for previous generations.
"The life expectancy factor is the trickiest one, because there is no way to confidently predict how long we will live, and we actually tend to underestimate our own longevity," says Mike Lynch, vice president of strategic markets for Hartford Funds. "While in the past, life expectancy was shorter, today we are living longer, healthier and more actively than previous generations before us. That's the good news and the bad news, because our retirement dollars may need to last longer and work harder than we realize."
As a result, Voya Financial points out that 59% of working Americans are very or extremely concerned about outliving their retirement savings -- with 74% having never calculated their monthly retirement income needs -- just taking that first step can be tough. Voya notes that retirees will need 70% of their current annual income to continue their current lifestyle in retirement.
That's proving to be a tough obstacle Though GOBankingRates notes that 13% of workers have $300,000 or more saved for retirement, about 30% of those age 55 and over have no retirement savings and 26% have less than $50,000. In fact, only 26% of Baby Boomers nearing retirement age have $200,000 or more, while 31% of Boomers over 65 can say the same.
That still beats the 52% of Generation X (ages 35-54) who still have less than $10,000 in retirement savings after the recession wiped out 45% of their net wealth on average, according to Pew Research Center. Roughly 31% of Gen Xers have no retirement account at all, though 40% of Gen Xers over 40 have more than $50,000 in retirement accounts. Among that group 7% have between $200,000 and $300,000 socked away, while 15% have $300,000 or more. Meanwhile, though 60% of Millennials (18-34) have started a retirement fund, 72% have saved less than $10,000 or nothing at all. A full 42% have no retirement savings, though that percentage shrinks to just 36% of those older than 25.
If you're looking for bare minimums, GOBankingRates and J.P. Morgan have calculated them out. If you're age 40 and making the $66,693 median salary, you should have more than $100,000 saved for retirement. Unfortunately, only 20% of people at that benchmark do. For the 50-year-olds making a median of $70,832 a year -- the peak of their earnings -- there should be close to $212,496 socked away. Only 22% have hit that mark. As for 60-year-olds coasting into retirement at $60,580 a year, only 26% have the recommended $260,500.
The best advice anyone can offer is to start now. Don't worry if you didn't start saving early on: Just get to saving. Edward Jones noted that 90% of its study's youngest respondents said they planned to or began saving in their 30s or earlier. However, only 64% of respondents ages 35 to 44 actually began saving in their 30s. Roughly 22% of all respondents say they began saving between the ages of 40 and 50.
Kids only make those plans for complicated. About 40% of workers in single-person households indicated that they are not currently saving, according to Edward Jones, compared to 51% in a household three or more. Similarly, 58% of those without children have already started saving, compared to 49% with children.
"Parents are recognizing the need to save earlier in order to account for additional costs, like education," Thoma says. "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."