It’s Up to You
Once upon a time, retirement meant stopping work at 65 and spending the rest of your days doing whatever you wanted while your Social Security and company pension checks rolled in.
As a financial advisor, the number one reason my clients came to me was to get help planning for their retirement--and it was a good thing they did. Pension funds and company 401(k) contribution match programs are disappearing. And under current laws, funding for Social Security could run out in 25 years--just as many of us are approaching retirement age.
The fact is: We are more responsible now than at any time in the last century for funding our financial futures. And yet, nearly half of Americans say they aren’t contributing to any retirement plan.
In the meantime, consumer debt keeps rising--as do the prices we’re paying for just about everything. Is it any wonder that so many people are pushing off retirement?
The good news is that, for every retirement pitfall to watch out for--and we’ve identified 10 big ones--there are ways to sidestep them to secure enough savings for your future. Here's how.
It’s inevitable: the more time passes, the more expensive things get. So, when planning for the future, make sure not to overlook inflation and its impact on the value of your money in the future. For example: to have what feels like $1 million today in 30 years, you need to have saved nearly $2.5 million! While that sounds downright depressing--trust me, I sympathize--the bigger point here is to make sure you don’t forget that pesky 3% annual cost of living increase (on average) when you’re calculating your retirement needs.
While you’re at it, consider how much you’ll really need to live the kind of retirement you want to live. Will your future lifestyle require millions? Or could you get by with less?
Want to hedge against inflation? Owning a home can help. The S&P/Case-Shiller index of property values increased 10.9 percent from March 2012 to March 2013, the biggest 12-month gain since April 2006. You can also consider Treasury Inflation-Protected Securities (TIPS). They provide for inflation-adjusted increases in both principal value and interest payments, are considered to be less volatile and more protective against credit and interest rate risk than conventional bonds. TIPS can be a smart core holding in your portfolio, but should still be combined with equities for better long-term growth. Also keep in mind that TIPS, like bonds, can lose value. You can buy them either directly from the government or through mutual funds or ETFs (which are more tax-friendly). And remember that the average returns on stocks are still better than inflation too. The S&P 500 index has returned an average of 10 percent over its history.
Don’t Rely on Company or Government Benefits
Fewer and fewer companies today offer a defined benefit plan, a.k.a. “pension,” that will pay you a certain amount of income each month after retiring. According to the Bureau of Labor Statistics, only around 18 percent of full-time private industry workers had a defined pension benefit in 2011—down from 35 percent in 1990. And, according to a recent report from the Congressional Budget Office, under present laws, Social Security will exhaust its trust funds in 2038, and would have to cut benefits by 19 percent to match payroll-tax revenues.
How to prepare? Consider:
*Opening an IRA. Maxing out your contributions each year is ideal. But if you can’t do that, put away as much as you can on a monthly basis, and see if you can increase the contribution amount every quarter.
*Researching annuities. An annuity is a contract between you and an insurance company that can provide you with a reliable income stream for a certain period of time in exchange for a lump-sum investment or series of investments.
Save, Save, Save
I know I may sound like a broken record, but more than half of all workers and retirees say they have less than $25,000 in savings, according to a 2011 survey by the Employee Benefit Research Institute. And while we all may have a thousand and one excuses for why we can’t save, the reality is that saving something, anything, is still better than saving nothing. Saving money doesn’t have to be hard if we make it a priority and as automatic as possible. Start with the smallest amount you can put away per week, and try to increase it monthly, or quarterly, as you build a bigger and bigger savings account. If you need inspiration, try one of our 7 savings challenges.
Don’t Let Debt Drag You Down
What are that cashmere sweater and leather bag really costing you? Depends on whether you paid with cash or put it on a credit card. Debt is one of the biggest threats to our retirement, and it's endemic to Americans. The average U.S. household has nearly $150,000 of mortgage debt, $35,000 of student loan debt and over $15,000 of credit card debt. That adds up to a whopping $200,000 of total debt!
How to break the debt cycle and start saving? In addition to focusing on paying down high-interest debt and building an emergency fund (with enough to cover 3 to 6 months of expenses) so you can avoid going into further debt in the event of unexpected expenses, consider that choices you’re making now have a direct impact on your future stability. If you find yourself with a sudden impulse to splurge, pull back and pause to think about the larger picture. If you live below your means now, you won’t have to do it in the future when you may have fewer options (and less income).
Consider the Cost of Childcare
Poll any group of working mothers out there and you’ll find one issue common to all that causes many a late night worry: the cost of childcare. With a recent report indicating that 40 percent of mothers are now the household breadwinner and 63 percent of women breadwinners are single mothers, it’s only an issue that’s going to become more important as time goes by. And while it may be encouraging to see the rise of women breadwinners in the U.S., the increase in working mothers has resulted in significantly more spending on childcare, which ain’t cheap.
For example, in 2011, annual fees for infant care in licensed centers ranged from $4,600 to $15,000 depending on the state and fees for before and/or after-school care ranged from $2,000 to $11,000. The cost of childcare can seem like a second mortgage and the emotional toll (mainly motherly guilt--I know, I admit it I’ve felt it too) can make it even more draining.
We need to consider more creative ways to better balance work and children so that we are not just working to pay for childcare and feeling badly about it at the same time. Some options:
* Nanny shares.
* Living close to (or with) family who can--and will--help.
* Moving to a state with lower childcare costs.
* And, of course, make sure you're sharing childcare responsibilities with your partner as equally as possible.
Don’t Buy Into Market Mayhem
As we witnessed in 2008, many investors saw much of their portfolios all but disappear in a matter of a few bad market months, scaring them into pulling out of the stock market in a panic. Unfortunately, that knee-jerk reaction only made things worse for them. That’s because the S&P 500 Index rebounded in 2009 and returned over 26 percent!
Maybe you were spooked about investing then and still are--and that's understandable. The problem is that letting emotion, especially fear, dictate your investment decisions can sabotage your future success. Investing is always a gamble, but not investing might be even more risky in terms of not being able to otherwise grow your money sufficiently (or outpace inflation).
The reality is that stock investing is one of the only ways to earn an average of 10 percent over the long term, so it's worth biting the bullet and riding the market roller coaster (it’s easier with your eyes shut). Be smart about it by starting early, diversifying your investment portfolio using an appropriate asset allocation strategy, rebalancing periodically, adding money on a regular basis, keeping your investment costs low, and staying put for the long run.
Keep an Eye on Your Career
Even with the economy rebounding, the job market can still be tough to navigate. A 2011 Census Bureau report revealed that the average U.S. family became poorer during the decade between 2000 and 2010 — the first decade-long income decline in at least a half-century. Specifically, median household income fell 2.3 percent to $49,445 in 2010, the lowest since 1996. Combine those facts with more jobs going the way of the dodo bird, as they're outsourced or replaced by newer jobs requiring new training and education, and you have a recipe for a labor crisis.
So, now what? The key is to stay relevant and keep learning. Pursue in-demand careers with good income potential that will not land you in a deep hole of student loan debt (article on this exact topic coming soon!). Also consider rebranding yourself by repackaging your skills to help you stay competitive in the marketplace.
Deal With Dependency
Welcome to the “Sandwich Generation.” According to the Pew Research Center, more than one out of every 8 Americans aged 40 to 60 is both caring for and supporting a child and a parent, hence being sandwiched between what can sometimes be a very expensive rock and a hard place. There is plenty you can do to make sure you don’t become the family martyr and sacrifice your retirement for the needs of others. Remember:
Loans exist for college, but not for retirement. Consider only paying for a portion of your child’s college education, to give you reserves to stock away into a retirement fund.
Get Long Term Care Insurance—both for you and your parents. A policy can help cover or pay for a range of services including in-home health care, a nursing home stay, or adult daycare. It all depends on the amount of coverage you want and, of course, how much you can afford.
Assess your parents’ situation with an in-depth talk. While you may not have been raised to talk about money with your parents, it’s important to understand what their assets are now, what their expectations for their living situations are in the future, and what kind of medical decisions they may want you to make for them in the future. It can be uncomfortable, but the more information you have now, the more you can prepare when decisions need to be made later.
Don't Let Divorce Bring You Down
Divorce is never pleasant, but even in situations where everything is divided 50/50, divorced women often discover that a seemingly fair settlement is still far from equitable. This is because women are typically awarded custody of the children and left to do the lion's share of child rearing, even in shared custody cases.
While caring for children is certainly a privilege, the cost can be a heavy burden. Lesson: The only person you should depend on for your financial security is yourself, even if you are married. Some things to consider to plan against the possibly detrimental effects of divorce:
Don’t forget to put yourself first. Even if you have joint accounts with a partner, make sure you’re maintaining your own individual accounts, including an emergency fund.
Maintain an individual line of credit. If you don’t already have one major credit card in your name only, open one so that in the event of divorce and the dissolution of joint accounts, you’re still maintaining your own personal credit history.
Take an inventory of all your assets and debts, including all “non-marital” assets that are considered to belong to only one spouse. This is crucial information to have on-hand for your lawyer, and for yourself, so you’ll know where your money is and where it goes.