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Strategies To Help Maximize Your Retirement Savings Potential

30 October 2015 in Investing Insights

Remember pulling all-nighters before your college exams? Trying to cram weeks worth of lessons into a couple hours rarely ends well. Putting off studying for a couple exams may not wreck your future, but would you take the same chance with your retirement?

Planning and discipline typically yield far superior results than procrastination. The farther away you are from retirement, the greater your potential to achieve a sizable nest egg in the future because time is on your side.

When You Actually Retire May Differ A Lot From Your Plans

If your retirement is several decades away, a lot of variables could come into play between now and then. You might have to cut your career short if you get sick or you may decide to work longer because it keeps you feeling young.

Life can be full of surprises and like it or not, things don’t always turn out the way we plan. For example, studies show large variances between when older Americans plan to retire versus when they actually do.1

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The estimated life expectancy in the U.S. is currently 78.88, up from 78.24 in 2010.2 Since over 80 percent of U.S. households have less than four years of their annual income saved for retirement, it means a lot of people could run out of money in the last decade their lives.3 Don’t let this happen to you.

Hope For The Best, But Be Prepared For The Worst

It’s nice to imagine that you’ll need less money in retirement, but many people underestimate the expenses and challenges that can arise. With healthcare costs continuing to increase, you may not be able to live off of 85% or less than what you’re spending in your pre-retirement years.4

The earlier you can start saving for retirement, the better your chances are to live a comfortable retirement that is financially secure. Here are some insights on retirement savings goals by age.

Don’t Underestimate Your 401(k) And Company Matching

The current maximum 401(k) contribution set by the IRS is $18,000 for 2015. Keeping the cap static, you could accumulate nearly $1.8 million in 40 years if you max out every year. Plus, you may be eligible for an income tax deduction with a 401(k) plan. A great goal is to start maxing out your 401(k) in your 20s or as soon as you can afford it.

If your employer offers a company match, take advantage of it. Even small amounts can greatly add up over time. For example, let’s say your employer offers a 4 percent match up to $4,000 per year. If your income is $100,000 or greater, that extra $4,000 a year could yield an additional $395,302 in 40 years.

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Be Careful Not To Downplay Expenses Either

Perhaps you have a goal to save $1 million by the time you want to retire if you’re single and $3 million if you have dependents. While that may seem like a lot of money, it still may not be enough to pay all of your bills thanks to inflation. It’s up to you to figure out how much you want to have in retirement for creature comforts and essentials, while still having enough for expenses.

Nobody wants to anticipate getting sick, but if your health deteriorates, the costs of long-term care could quickly eat away at your savings. For example, 1 year at a nursing home in San Francisco costs about $146,000 after taxes.5 That doesn’t even cover the cost of food, medications, doctor’s visits or medical treatments. Build a safety net into your retirement savings goals for peace of mind.

401(k) Alternatives

If you don’t have access to a 401(k) plan, or want to contribute to additional retirement plans, alternatives include tax-advantaged IRAs. They come in two major types: traditional and Roth.

Traditional IRAs are tax deferred, meaning you could receive a tax deduction upfront, but responsible for any taxes due on distributions down the road. Roth IRAs are funded with after tax money, thereby making the withdrawals tax-free during eligible years.

The major downside is the low annual contribution limit. For 2015, the maximum contribution to all of your traditional and Roth accounts cannot exceed $5,500 for those aged 49 and under or $6,500 for people 50 and over.6 The wealthy also get phased out as seen in the modified adjusted gross income (MAGI) limitations for Roth IRAs outlined below.

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Source: IRS

If you have a lot of money in a traditional IRA, consider moving small increments into a Roth IRA. Just be aware that converting a traditional IRA to a Roth IRA can have tax impacts. It’s best to check with a tax advisor to see how a conversion could impact your situation.

SEP IRAs

Simplified Employee Pension Plans, also known as SEP IRAs, are another retirement plan option. Businesses of any size, including the self-employed, can setup SEP plans.

What’s different about SEPs is the employer gets to decide how much to contribute to participants. Higher payouts can’t be offered to top performers either. The IRS requires all eligible employees to receive the same percentage.7

The SEP contribution limits for 2015 are the lesser of 25 percent of an employee’s compensation or $53,000.

Save Beyond Contribution Limits

If you’re able to contribute the maximum limits for your retirement accounts each year, fantastic! But don’t let that stop you from saving even more in after tax accounts. Retirement plans, such as IRAs, have a 10% early withdrawal penalty before age 59 ½ . As a result, having liquid investments is also important.

Saving for retirement doesn’t have to be focused solely on investing in the stock market either. Diversifying into real estate, private equity, and creating a side business are all viable alternatives as well if approached properly.

However you decide to invest, keep investment fees to a minimum. Seemingly small fees can eat away at your retirement savings potential over time. Other tips to help you build your retirement savings include reaping the benefits of fractional shares, using an HSA account, and rebalancing your portfolios regularly.

Get Busy Investing

When it comes to retirement savings, it’s better to end up with too much, than too little. To help manage life’s curve balls, create a realistic plan that incorporates your savings goals, desired lifestyle needs, and a cushion to cover unexpected expenses and emergencies.

Consider a commission free Horizon Motif, which you can tailor to your individual risk tolerance and retirement time horizon needs.

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1 GAO, “Retirement Security” United States Government Accountability Office, May 2015. http://www.gao.gov/assets/680/670153.pdf
2 Geoba, “The World: Life Expectancy (2015) – Top 100+,” Canty Media, 2015.
3 Woolley, Suzanne, “The Retirement Savings Gap Between Haves And Have-Nots Is Getting Bigger,” Bloomberg Business, March 12, 2015.
4 Blanchett, David, “Estimating The True Cost Of Retirement,” Morningstar, November 5, 2013.
5 AARP, “Long-Term Care Calculator: Compare Costs, Types Of Service In Your Area,” AARP, 2015.
6 IRS, “Retirement Topics – IRA Contribution Limits,” Internal Revenue Service, January 22, 2015.
7 IRS, “SEP Contribution Limits (including grandfathered SARSEPs),” July 13, 2015.

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  1. Colleen
    8 Nov at 11:40 pm

    I’d like to retire in my 50s if possible! 67 sounds just too far away and frankly quite difficult. My parents are in their late 60s and have a lot of health troubles – I can’t imagine having to work full time at their age.

    Reply
  2. Jenny
    19 Nov at 8:22 am

    I love reading about retirement. Really motivates me to continue investing and contributing to my retirement plans. I maxed out my 401k this year, yay!

    Reply
  3. Brian
    27 Nov at 10:25 am

    My company has a 4 percent match per payroll contribution. Instead of maxing out as quickly as possible during the year, I equally divide the maximum contribution across all 12 months so that I don’t miss any pay cycles of company match. And then I invest any excess cash into my other accounts year round. It can really add up.

    Reply

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