Retirement seems like it’s a long way off. But it will be around the corner before you know it. In fact, It could even come sooner than you expect: A significant number of Americans are forced to retire ahead of schedule, due to a variety of factors.
But let’s assume you’ll retire on schedule in 30, 40 or 50 years at age 67 – the current “full retirement age” for Social Security. Most financial planners recommend you have at least 10 times your income at retirement age stashed away in retirement accounts.
Are you on schedule? Or are you slipping off the pace?
Well, let’s make some assumptions:
You’ll retire at age 67
You’ll allocate at least 50 percent of your retirement savings to stocks and stock funds for long-term growth.
You start saving soon after college, at age 25.
Fidelity Investments crunched some numbers, assumed historic returns for equities, bonds, and cash equivalents. Here’s what they came up with:
To stay on track to have 10 times your income put away by age 67, you should be hitting the following milestones:
Age 30: 1 times income
Age 35: 2 times income
Age 40: 3 times income
Age 45: 4 times income
Age 50: 6 times income
Age 55: 7 times income
Age 60: 8 times income
***Age 67: 10 times income***
Given the historic stock market performance and some reasonable expectations of market returns, this timeline should be reasonably attainable for workers who start saving at least 15 percent of their incomes in tax-advantaged retirement plans (IRAs, 401(k)s, 403(b)s, Thrift Savings Plans and the like).
Are you on track? Studies show that most people are falling behind. For example, the average college graduate with student loans graduates with a balance of $30,000. So that puts many new grads in a minus 0.5 times income to minus 2 times income hole.
With student loan payments increasingly causing young workers to put off saving for retirement, many younger workers will be falling behind this timeline.
Don’t try to keep up with your neighbors’ lifestyle
Your neighbors are broke.
The ugly truth is that the median household has only about $5,000 in retirement savings. And even the median couple in their 50s or 60s has less than $20,000 saved up. They should already have between six and ten times their income put away, but they’ve only saved a fraction of one year’s income, and they are about to retire.
Don’t let yourself become like them.
How to catch up
First, buy some term life insurance. If you have a family, this locks in a lifetime of financial contributions to your family’s well-being even if you aren’t around to see it.
If you are 25 and you died tomorrow your life insurance would have to replace 42 years of income, together with pay raises and bonuses (minus what it doesn’t cost to feed you anymore!) so 12 to 20 times your income in life insurance is not unreasonable for someone just starting out.
Second, buy some disability income insurance. This is insurance that replaces up to 50 to 65 percent of your income if you are disabled and can’t work anymore. Why do you need it? Because according to statistics from the Social Security Administration, More than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age.
And the average disability insurance claim lasts 34.6 months, according to the Council for Disability Awareness.
If you don’t have three years of income in emergency savings, you’re going to zero out your retirement savings just trying to cover basic living expenses during that time.
Those two basic financial planning measures will help cover you against the most disastrous scenarios – and protect your family’s long-term financial security even if you aren’t able to work.
You can recover from just about anything else. But you and your family can’t recover from your death or sudden end to your career because of disability. So cover these risks first.
Pick up at least your 401(k) match.
If your employer matches 401(k) contributions, contribute at least enough to pick up the company match. This is usually a better payoff than paying down debts or any investments you’re likely to make on your own: No mutual fund or annuity is going to guarantee you 50 cents to a dollar of return for every dollar you invest. But your 401(k) matching program might. The median 401(k) plan sponsor matches up to 3 percent of your annual income from that employer. So tighten your belt, contribute and take advantage of it.
Ask your employer if they have a student loan repayment assistance benefit.
Some employers recognize that younger workers (and some older ones) appreciate help paying down student loan debt, and make some form of assistance available as an employee benefit.
It doesn’t just benefit employees. There are many important advantages to employers who offer student loan repayment benefits as well.
If you have student loans and your employer offers a student loan repayment benefit, sign up as soon as you’re eligible.
It may make sense to refinance your student loans if you can get a much better interest rate. But read this first before you refinance a federal student loan.
Savagely attack credit card and consumer debt.
With average interest rates 3-4 times what a federally-guaranteed student loan costs, and more than twice what most regard as a reasonably-expected long-term return on stock mutual funds and anything you’re likely to buy in a retirement account, credit cards, sub-prime car loans, and other debts are a cancer on your long-term financial future.
After your basic necessities are taken care of and you have a bit of cushion for emergencies, throw every dollar you can against your credit card, car loans, retail store cards, gas cards and other forms of consumer debt.
You can use the debt snowball method (smallest debts first) or the avalanche method (highest interest rate debt first). Either works. Pick one and put your shoulder to the wheel and power through it. The sooner you get all your non-mortgage debt zeroed out, the sooner you can begin to make real progress on your long term financial goals.
Invest at least 15% of your income for the long term.
Fidelity’s milestones are based on a savings rate of 15 percent of a worker’s annual income. However, if you’ve fallen off the mark, you should be saving even more if you want to have a good chance of catching up.
Take full advantage of tax-advantaged retirement accounts:
401(k)s and 403(b)s
Health Savings Accounts (if you have a high-deductible health plan (HDHP). The money you don’t spend on health care gets treated like a traditional IRA when you turn 65, so money in HSA can do double duty: it’s there to help pay for health care if you need it, and if you don’t, it’s another resource for retirement.
Don’t assume you can just delay retirement.
Many people assume that they can simply keep working well into their senior years, and keep saving. It’s great if it works out – and if you enjoy what you do for a living.
But assuming you can simply stay in the workforce into your 70s and 80s earning what you’re accustomed to may turn out to be a bad bet: A majority of retirees over 55 report they were forced into retirement earlier than expected. You may not have a choice.
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