Old views of traditional retirement are gone. New retirement will look different.
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If you’ve got more money, you’ve got more retirement options. High-income earners have substantial resources at their disposal, presenting the potential for massive gains and crushing losses. However, practical strategies and careful financial decisions can help you retire as a multi-millionaire. High-income earners often have different retirement needs than others. Here’s how much high-income earners are saving and how to get your savings on track.
If you’re falling behind on your retirement savings goals, a financial advisor can help you create a financial plan.
How Much High-Income Earners Have Saved for Retirement
A high-income earner is an individual or household that earns a substantial amount of money compared to the average income in the country. High-income earners in the United States make over $500,000, putting themselves in the top 1% of the wealthiest households in the country. For a comparison, the median household income in the United States in 2022 was $74,580. As a result, you must make over seven times the typical household income to be a high-income earner.
While saving for retirement has no one-size-fits-all answer, high-income earners usually save more because of their financial abilities. Specifically, high-income earners save $2.68 million by their mid-to-late sixties.
Remember, having a high income doesn’t automatically equate to having a secure retirement fund. Proper financial planning, budgeting and investing are crucial for anyone, regardless of income level, to ensure a comfortable retirement. Additionally, factors like lifestyle choices, debt levels and unexpected expenses can all impact how much an individual or household can save for retirement.
Average Retirement Savings By Age of High-Income Earners
High-income earners start with significant retirement savings and accumulate more throughout the decades.
Let’s take a look at how much each age group has saved for retirement in 2022. Data comes from the Federal Reserve Board and is based on the mean amount for each age group:
Based on the data, retirement savers under age 35 saved almost one-tenth as much as those 75 and older; and almost one-third as much as those between ages 35 and 44. Retirement savers between ages 65 and 74 saved the most — over 12 times more than those under age 35.
Where Your Retirement Savings Stand
Evaluating your current retirement savings is a crucial but challenging task as you work your way to your golden years. A detailed retirement plan incorporates your monthly budget, savings goals and lifestyle, among other factors.
For example, you might decide to save specific amounts when you reach a certain age, such as three times your salary by age 40. On the other hand, you could set one savings goal, such as $3 million by age 65.
Additionally, your savings method is foundational to your plan. You could save 10% of your salary every year or set a stringent monthly budget and dump as much as possible into various assets.
Remember, your investment strategy is as critical as the money you set aside. For instance, choosing low-fee investments, maxing out your accounts (401(k)s and IRAs), and automating savings will help boost your nest egg as you go. Furthermore, minimizing debt means you’ll have more to put towards retirement.
The essence of retirement is setting specific savings goals and following a disciplined approach to achieve them. That being said, financial obstacles (divorce, education for children, etc.) and temptations to spend more in the present can hinder anyone’s retirement savings plan. As a result, consulting a financial expert could help you create and execute your plan.
How to Get Your Savings on Track
High-income earners have unique opportunities and challenges when it comes to retirement planning. Here are four common strategies to help get your retirement savings on track:
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Maximize contributions to tax-advantaged accounts. Contribute the maximum allowable amount to your tax-advantaged retirement accounts. In 2023, the maximum annual contribution for your 401(k) is $22,500 ($23,000 in 2024); and $6,500 for your IRA ($7,000 in 2024). Additionally, catch-up contributions are available to savers age 50 or older, increasing maximum contributions by $7,500 for 401(k)s and $1,000 for IRAs in both 2023 and 2024.
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Consider non-qualified deferred compensation plans. Non-Qualified Deferred Compensation (NQDC) plans have no contribution limits and more flexible withdrawal rules. These plans are available only for executive-level roles high-income earners often occupy, and can offer these employees a unique tax advantage by allowing them to set aside significant portions of their income for retirement beyond a 401(k)’s limits.
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Expand your investment types. Open a brokerage account, buy real estate, or become a stakeholder in a small business. These alternatives could help diversify your portfolio and mitigate risk. Remember, each asset has specific tax implications.
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Avoid lifestyle inflation. This will involve making intentional financial choices to prevent your expenses from rising with your income. Start by setting clear financial goals, both short- and long-term, to give yourself a clear sense of direction. Create a budget to track your income and expenses, distinguishing between essential needs and discretionary spending. Automate your savings and investments so a portion of your income consistently goes towards your financial goals. Then review and adjust your budget to align it with your evolving financial situation and goals.
Bottom Line
High-income earners can save a lot of money. But, they will need to take effective steps to secure their financial future. Key steps include maximizing contributions to tax-advantaged accounts, considering non-qualified deferred compensation plans and diversifying investments.
Tips for High-Income Earners Saving for Retirement
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A comfortable retirement isn’t automatic, regardless of your income level. Fortunately, a financial advisor can help you tackle specific challenges for your retirement needs. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Taxes and lifestyle can drain your finances, drying up your savings capacity. Here’s where high earners lose most in these areas and how to counteract them.
Photo credit: ©iStock.com/fizkes, ©iStock.com/szefei, ©iStock.com/brizmaker
The post How Much High-Income Earners Have Saved for Retirement appeared first on SmartReads by SmartAsset.
The idea of retirement as envisioned by our parents is undergoing a radical change. Once viewed as the last chapter before death, it has now morphed into an intermediate phase that is no longer synonymous with old age or complete inactivity. Today, a typical retiree can reasonably expect to live another 20 to 30 years, ideally in good health, provided they continue to exercise both body and mind. In this context, the word “retirement” seems obsolete. It is perhaps more fitting to refer to it as the “third half” of life.
However, retirement often entails a profound change of identity, especially if work played a substantial role in shaping one’s identity. Losing much of what defines us while still possessing the energy and desire for a working life can be profoundly disorienting.
Getting the transition to retirement right is vital for retirees, their colleagues, and organizations. Through our research and interactions with professionals navigating this shift, we have pinpointed four psychological mindsets associated with the transition to retirement.
The switch
Vanessa was a partner in an audit firm in Paris. At the age of 51, she decided to cease her professional activity. “I was getting old and realizing it,” she says. She gave herself two years to organize her succession and slowed down, changing her occupation day by day.
“Things had changed in my head; it had become difficult to stay at 100%,” she says, adding that she was thinking about her “future job.” A year after her retirement, she remains active, but in a different field, now running a bed and breakfast hotel in Marseille. She takes daily walks to the market to source produce for her guests, and winters in the southern hemisphere for two months during the winter lull.
“Switch” professionals like Vanessa describe a natural transition to their “third half” identity. The common feature among them is how carefully they prepare with small incremental changes and open discussions about their plans. They seem to have departed from their former professional identity without regret, moving towards a new identity that they may not idealize but recognize for its positive benefits.
Transcendence
Denis retired a year ago. He is critical of his former professional environment, where he feels there is still a strong “alpha male” culture and excessive professional commitment. Nevertheless, he serves as a non-executive director of various organizations, one of which is a former client of his.
Other aspects of his work, however, are completely new to him. He has learned to cede executive control and take a position of oversight, which is both rewarding and different. Above all, he has adopted a holistic approach to life, leaving more room for what he finds deeply fulfilling and interesting. For instance, he takes pleasure in coaching a junior basketball team in his spare time.
Individuals who are “transcending” share similarities with professionals going through a rapid “switch.” However, the distinction lies in their desire to maintain a professional identity and shift in steps. They exist in a liminal stage, straddling between two places. Even if they are ready to engage in new activities, they do not wish to completely give up their professional lives, whether in terms of activities or the customers they serve. They have one foot in the new and one still in the old, offering a sense of psychological stability and solace.
Regret
Gregory, a former accounting partner, retired and became an independent consultant. He left at the mandatory age of 55 years old, relatively disillusioned but in good health. Relieved to have left the political aspects of his former organization behind, he is bitter about his new role, which he expected to have more purpose. He feels alone and lacks administrative support. To Gregory, enforced retirement felt like a schism.
Much like the “transcending” retirees, those in the “regret” mindset find themselves stuck in the middle between their professional and retiree identities. Their choice seems more painful, caught between two identities that they fundamentally dislike. Two common characteristics include a form of pessimism regarding their future and a lack of attachment to their current professional identity.
Although they are often strongly critical of their former role, they would have stayed in their profession if they had been given the choice. In short, they are deeply ambivalent and in a subdued emotional state. The former working identity was known but unwelcome, whereas the anticipated identity as a retiree remains vague and induces anxiety.
The false start
Akiko reached an agreement with their law firm before leaving, allowing them to continue the activity of counsel and work with their team and clients. Knowing that they would remain with their organization, they did not prepare for retirement. “It’s a bit egotistical… What am I supposed to do? Be like the mastermind that liquidates itself?”
Akiko has maintained elements of their prior role, including the pension plan, office, and parking space under the building. People who “false start” struggle to let go of their attachments, move on, make themselves redundant, and properly plan for succession. There seems to be a denial of the need to bring new generations into the mix. They never really leave the starting blocks, hardly shedding their professional identity. Their day-to-day activities are very similar to the ones they have been doing until now. Instead of accepting their status as retirees, they deliberately, and often to their detriment, find themselves incapable of letting go of their profession.
Why retirement matters and what to do about it
Future retirees are often disoriented and relatively anxious about this new phase in their lives. As a result, organizations must carefully consider their approach to dealing with this segment of their talent pool. Should they opt to let them go completely, or do they see an advantage in maintaining a close relationship to benefit from their experience, knowledge, or network? To support and guide them toward the chosen strategy, organizations might consider the following initiatives:
Demystify procedures and guidelines
Given that retirement remains a taboo subject in many organizations, with expectations, procedures, and available options often unclear, it is important to be transparent about the company’s strategy.
Discussing the consequences of retirement together allows both parties to prepare. This can include conversations about financial considerations, access to the workplace, participation in events, and use of email. Financial incentives could be structured to discourage people from “hanging on” indefinitely.
Celebrate and honor the retiree
Organized programs can initiate and support the transition into retirement, as well as an event to say goodbye and honor their legacy. This experience can be positive for both those leaving the organization and their colleagues. Sabbaticals near the end of the executives’ tenures can provide a psychological release to explore new horizons. Assigning people ambassadorial roles at conferences and other visible and high-status events also sends an appropriate signal to the market and the individual.
Provide support
Providing people with time for reflection and creating a space for reflective practice is essential to help them prepare for retirement. Individual coaching or, better still, group coaching, can be invaluable in this regard. This allows them to reflect on their transition, verbalize their feelings and misgivings, and receive the advice and benchmarking they may need.
Despite being laden with anxiety, the so-called third half can be the most glorious chapter of life. Liberated from the shackles of insecurity and aware of their competencies and strengths, people can be empowered to contribute to broader social systems. Rather than perpetuating a taboo, healthy companies address the subject early, identify the specific mindset of each individual, and gently guide them towards a different and more constructive future.
Graham Ward is an adjunct professor of organizational behavior at INSEAD and the director of the Challenge of Leadership program for C-level executives. Isabelle Lebbe is a partner in the investment management practice of Arendt & Medernach.
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The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
This story was originally featured on Fortune.com
Savers who put money into traditional IRAs and 401(k)s get a nice tax break. Contributions up to an annual limit exempt some of your earnings from taxes, so if you fund one of these accounts, you get to not only set money aside for retirement, but pay the IRS a little less.
But because your contributions to a traditional IRA or 401(k) plan go in on a pre-tax basis, the IRS wants you to leave your money alone long enough for it to serve as income for retirement. As such, there’s a 10% early withdrawal penalty that generally applies to distributions from these accounts taken prior to age 59 1/2.
Now there are a few exceptions. IRAs, for example, allow you to withdraw up to $10,000 to purchase a first-time home. You can also tap an IRA early to pay for higher education.
Image source: Getty Images.
But even if you’re able to take an IRA or 401(k) withdrawal without incurring a penalty, doing so prior to actual retirement could hurt you in a very big way. Here’s why.
It’s a matter of lost investment gains
Clearly, a 10% early withdrawal penalty has the potential to cause you financial harm. But even if you’re able to avoid that penalty, raiding your IRA or 401(k) might harm you financially in another way.
The money in your IRA or 401(k) shouldn’t just sit in cash. Ideally, you’re investing that money so your balance grows nicely over time. As such, any dollar you remove from an IRA or 401(k) early is money you can’t keep investing. And the consequences there could be huge.
Let’s say you take a $10,000 withdrawal from your IRA at age 35 to purchase a home. But let’s also assume you then don’t retire until age 70. Furthermore, let’s assume that your IRA portfolio delivers an average annual return of 8%, which is a bit below the stock market’s average.
By missing out on the opportunity to earn 8% on your $10,000 withdrawal over 35 years, you’re losing out on almost $148,000 of retirement income. That could potentially constitute a few years’ worth of bills for your senior self, depending on what your costs turn out to be.
Be careful even when taking a withdrawal after age 59 1/2
Once you turn 59 1/2, you can remove funds from your IRA or 401(k) without having to worry about a penalty. But even then, it’s important to be careful.
Let’s say you’re thinking of removing $20,000 from your 401(k) to renovate your home at age 60. That money is yours free and clear of penalties. But let’s also assume you’re not retiring until age 68, and that your portfolio delivers a yearly return of 6% in your 60s (since, by then, it’s good to shift to more conservative investments).
Losing out on a 6% return on $20,000 over eight years means missing out on about $32,000 in retirement income. That’s still a notable sum. It could, for example, end up being money you need to pay for healthcare down the line.
The fact that the IRS imposes early withdrawal penalties on IRAs and 401(k)s is actually sort of a good thing, since it may be the factor that helps you stay disciplined and avoid tapping your savings prematurely. But even if you’re able to avoid a penalty, it still pays to try not to take a withdrawal from your IRA or 401(k) until you’re actually retired and absolutely need that money.
The fourth quarter ended on an upswing for retirement savers.
Retirement-account balances hit their highest levels in two years amid improved market conditions and consistent savings rates, according to Fidelity Investments.
The average 401(k) account balance was $118,600 in the fourth quarter, up 14% from a year ago, Fidelity said. The average IRA balance was $116,600, up 12% from a year ago. The average 403(b) balance was $106,100, up 14% from a year ago.
“This past year ended on a high note for retirement savers,” said Sharon Brovelli, president of workplace investing at Fidelity Investments. “When it comes to matters like market stability and economic events, 2023 gave us the highs of the highs and the lows of the lows, but encouragingly, many retirement savers took the long view and stayed the course through it all, which is the type of commitment that can lead to a secure financial future.”
For Gen X workers who had invested in a 401(k) for 15 years straight, the average balance topped half a million dollars ($501,000) at year-end 2023, which Fidelity said illustrated the benefits of consistent long-term savings. Gen X represents people born from 1965 to 1980.
The fourth quarter also saw a jump in the number of 401(k) millionaires, Fidelity said. The number of people with at least $1 million in their 401(k) increased to 422,000, up 20% from the third quarter of 2023, when the number of millionaires had dropped due to market conditions. The fourth quarter also showed an 11.5% increase from the second quarter of 2023.
“Americans love that millionaire title or that idea of a million dollars,” said Michael Shamrell, vice president of thought leadership at Fidelity’s workplace investing division. “The 401(k) millionaires demonstrate a lot of positive attributes. The average tenure of the millionaires is 26 years. That’s going back to 1998. They’ve seen the dot-com crash, 9/11, they’ve seen the market go up and down and they are examples of staying the course.”
The savings rate for the millionaire investors was 26.6%, which includes their personal investments as well as contributions from their employer, Shamrell said.
“Admittedly, not everyone can save at those rates,” he said.
Overall, the total 401(k) savings rate remained steady at 13.9%, including employee and employer contributions, which was consistent with the second and third quarters of 2023 and up slightly from the prior year’s fourth-quarter rate of 13.7%, Fidelity said.
And in 2023, 37% of workers increased their retirement-savings contribution rate, Fidelity said.
With required minimum distributions not kicking in until age 73, according to provisions in 2022’s Secure 2.0 Act, most pre-retirees and retirees under age 70 maintained a savings mindset and did not withdraw from their 401(k) plans. Only 20% of retirees ages 70 to 72 made 401(k) withdrawals. A total of 94% of retirees ages 73 and older made 401(k) withdrawals in 2023.
Among Gen Z investors — those in the generation born from 1997 to 2012 — the number of Roth IRA accounts increased by 50% in the fourth quarter of 2023, compared with the same period of the previous year. Roth IRAs feature after-tax contributions and tax-free withdrawals.
“We continue to see positive savings behaviors across the board for Gen Z. The numbers are really positive,” Shamrell said. “We need to keep an eye on them, as the oldest [Gen Z members] are approaching their late 20s, when they might be thinking about getting married and buying a house. We want to keep an eye on them to see if the positive savings behavior continues.”
Not only is retirement readiness different for each individual, not many of us are even able to describe what that actually looks like.
Successful retirement planning requires a multi-layered exploration of our wants, needs, financial anxieties and risk tolerance, along with sensitivity to what we really mean in addition to what we actually say. There’s a close analogy to psychotherapy.
This is why it’s an exercise in futility for Wall Street firms to conduct their periodic surveys of retirement readiness. Not surprisingly, these surveys often reach widely divergent conclusions.
Wall Street nevertheless keep trying. A half-dozen such firms have reached out to me already this year, publicizing their latest surveys. One published a report on Feb. 13 announcing that the U.S. retirement crisis is worse than ever, with two-thirds of workers not saving enough for retirement — and nearly one in four without enough savings to even pay for their funeral expenses.
Meanwhile, another survey — released two weeks earlier — found that 70% of U.S. workers are confident that they have saved enough for a comfortable retirement.
The inherent weakness in these surveys is that they are trying to quantify the unquantifiable. Take, for example, the survey finding that two-thirds of workers aren’t saving enough for retirement. It reached this conclusion by measuring the size of respondents’ retirement portfolios, then comparing it to a single across-the-board dollar amount that the surveyors claimed was necessary to retire comfortably.
But there is no one-size-fits-all when it comes to a retirement portfolio. Benjamin Graham, the father of fundamental analysis, made this point in his famous book “The Intelligent Investor”: “The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
How many of us can answer the question “where you want to go” with more than bromides? This isn’t to say that having a sizeable portfolio is unimportant to retirement readiness. But the relationship between money and happiness is surprisingly inscrutable. Take recent research by Matthew Killingsworth, a professor at the Wharton School, and Princeton University professors Daniel Kahnemann and Angus Deaton.
The researchers found that more money brings more happiness in large part only if you are a happy person to begin with. If you’re an unhappy person, then money helps you only to a limited extent. Even for happier people, the impact of more money is a lot less than you think: A “four-fold difference in income is… less than a third as large as the effect of a headache” on a person’s feelings of happiness on a given day.
Financial advisers can play a valuable role in helping us sort out these thorny questions, Of course there are unscrupulous advisers who take advantage of vulnerable retirees and near-retirees. The presence of such advisers only reinforces the importance of searching for an adviser carefully. Just don’t let the considerable complexity of retirement planning dissuade you from the search.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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When we think about saving for retirement, many of us may be inclined to put all of our money into a single account. And that’s not necessarily a terrible thing.
Let’s imagine you open a single retirement account, but you invest your money across a range of assets. As long as you’re well diversified, you may be setting yourself up to retire comfortably. Plus, sticking to just one account could make your wealth easier to track.
But it could also very much pay to spread your retirement savings across a few different accounts. Here are three in particular that you may want to use in conjunction with one another.
Image source: Getty Images.
1. A Roth IRA
The nice thing about Roth IRAs is that they give you plenty of flexibility with your money. Don’t want to take withdrawals in retirement? No problem. Unlike traditional retirement plans, Roth IRAs don’t impose required minimum distributions.
Plus, with a Roth IRA, you get to enjoy the benefit of tax-free gains while you’re building savings, and then tax-free withdrawals in retirement once you decide you are looking to tap that account.
2. A taxable brokerage account
Some people struggle to retire on time, but if you save enough money, you may end up in a position to retire early. That’s why it pays to save for your future in a taxable brokerage account on top of a tax-advantaged one. This way, you won’t be limited in how much you can contribute each year. Plus, you’ll have the flexibility to take withdrawals whenever you please without having to worry about penalties.
3. An HSA
A health savings account (HSA) is a terrific savings account from a tax perspective. Contributions go in tax-free, investment gains are tax-free, and withdrawals are tax-free when used to pay for qualified medical expenses.
The nice thing about having money in an HSA is that you have separate funds available to cover healthcare costs. Those could be more expensive than expected once you move over to Medicare (and not just because of Medicare itself, but also, your age may mean you need more healthcare).
A winning combination
You could opt to save for retirement in a single account. But the combination of these three in particular gives you a lot of benefits. You get a good number of tax breaks, a fair amount of flexibility, and some separation of your money, so to speak, so that you’re not leaving yourself short on funds for healthcare spending.
Now, that said, Roth IRAs and HSAs do have eligibility requirements. With the former, there are income limits, and with the latter, your health plan needs to have a certain minimum deductible and out-of-pocket maximum that changes from year to year.
Anyone can save in a taxable brokerage account, though. So if you’re not able to fund a Roth IRA or HSA, you may want to sit down with a financial advisor and come up with your own combination of accounts that makes it possible to enjoy the comfortable retirement lifestyle you deserve — on a timeline that works well for you.
As Generation X edges closer to the traditional retirement age, with the oldest members born in 1965, a palpable sense of financial unpreparedness permeates this cohort.
Insight from a Fortune article featured on Yahoo Finance, fueled by responses from numerous Gen Xers, lays bare the anxieties many feel about their retirement readiness. In addition to being tagged with various monikers such as the “forgotten generation” and “the latchkey generation,” a significant portion of Gen X finds itself grappling with the reality of insufficient retirement savings.
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The challenge of securing a financially stable retirement is underscored by data shown in a report from the National Institute on Retirement Security, which signals a glaring disparity between the desired and actual savings among many Gen Xers. This sentiment is echoed in the Schroders 2023 U.S. Retirement Survey, revealing that over 60% of non-retired Gen Xers doubt their ability to achieve a comfortable retirement.
The survey highlights that the average Gen X household has amassed $40,000 in retirement savings, a figure drastically inadequate compared to the million-plus dollars financial experts recommend.
The narratives of individual Gen Xers further illustrate the depth of the retirement readiness crisis. “I’ve followed my dreams, as my generation was told to do, but found that some dreams cost more to follow than others,” writes one Gen Xer. “My savings are virtually nonexistent.” Another candidly shares, “I’ll likely die before I can retire. Fun stuff,” underscoring the dire financial outlook some face as they approach retirement.
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These personal accounts shed light on the myriad challenges that have contributed to the financial predicament facing Gen X. From navigating economic downturns and market crashes to adjusting to the shift from pensions to 401(k) plans, Gen Xers have contended with significant financial hurdles. Additionally, they bear the burden of higher student loan debts and healthcare costs compared to previous generations.
However, not all Gen Xers view their retirement prospects through a lens of pessimism. Some have successfully navigated the economic landscape, achieving financial security and even early retirement. These success stories, though less common, provide a glimmer of hope and a different perspective on the retirement readiness of Gen X.
The broader picture, however, remains one of concern and calls for action. Industry experts like Deb Boyden from Schroders highlight the precarious position of Gen X, being the first generation to predominantly rely on 401(k) plans.
While Gen X may not be prepared overall as a generation, they can employ targeted strategies to strengthen their retirement readiness. Incorporating the wisdom and expertise of a financial adviser into a retirement planning strategy could bolster Generation X’s efforts to achieve a secure and comfortable retirement.
Financial advisers play a crucial role in navigating the complexities of retirement savings, offering tailored advice that considers an individual’s income, assets and retirement goals.
Diversification stands as a cornerstone strategy for Gen Xers to mitigate risk and enhance potential returns. By spreading investments across a variety of asset classes, such as stocks, bonds and real estate, individuals can protect their portfolios from significant losses tied to any single investment. This approach is complemented by exploring alternative investments, including commodities or private equity, which can offer growth opportunities outside traditional markets.
Maximizing retirement savings is important, particularly through vehicles like 401(k) plans and Individual Retirement Accounts (IRAs). For those with access to a 401(k), making the most of employer contributions and taking advantage of catch-up contributions for those over 50 can substantially increase retirement savings. IRAs, both Traditional and Roth, offer unique tax advantages that can be tailored to an individual’s financial situation, with Roth IRAs providing tax-free growth and withdrawals, beneficial for those expecting to be in a higher tax bracket in retirement.
For self-employed Gen Xers, the retirement saving landscape includes distinct options such as Solo 401(k)s and Simplified Employee Pension (SEP) IRAs. A Solo 401(k) plan allows self-employed individuals to make contributions both as an employer and employee, significantly increasing the potential for savings. SEP IRAs offer a straightforward, high-contribution limit option for entrepreneurs, while a Roth IRA remains a flexible choice for those with variable incomes. For those seeking to rapidly accelerate their retirement savings, defined benefit plans can provide a pathway to save large amounts in a short timeframe, particularly beneficial for older business owners focusing on catch-up contributions.
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*This information is not financial advice, and personalized guidance from a financial adviser is recommended for making well-informed decisions.
Jeannine Mancini has written about personal finance and investment for the past 13 years in a variety of publications including Zacks, The Nest and eHow. She is not a licensed financial adviser, and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Mancini believes the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.
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This article ‘I’ll Likely Die Before I Can Retire’ – Gen X, ‘The Forgotten Generation’ Is Struggling With ‘Virtually Nonexistent’ Retirement Accounts – The Average Gen Xer Has Only $40,000 Saved originally appeared on Benzinga.com
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It’s the worst-case scenario of retirement. You have worked, saved and built up the nest egg. You haven’t got a care in the world until one day you notice it… the money seems to be getting a little bit tighter. The bank accounts seem to be a little weaker than they should be. The bills are getting a little more stressful. You’re running out of money. The idea of outliving your retirement savings is terrifying. Fortunately, there are ways that you can keep an eye out for this problem to catch it and prevent it before things go too far. Here are five warning signs that you may be running out of money in retirement and what to do if you see it happening. You may also want to consult with a financial advisor if you’re worried about this being a possibility for your retirement.
1. Your Accounts Are Declining Too Quickly
What To Do – Set A Monthly Budget
This is a general issue for personal finances. When it comes to money, most people use an approach called “intuitive spending.” That is, they spend and save money as it feels reasonable. Unfortunately, most people are also quite bad at intuitive spending. They lose track of their money and it starts to go faster than they realized.
The best way to address this is with monthly budgeting. In retirement, don’t simply raid your savings at need. Instead, treat your monthly drawdown like an income. Move the money into checking and savings each month, then build a spending budget around that income.
The more you treat your portfolio as a simple pool of cash, the more likely you will make too many withdrawals without realizing it. The more you judge your spending by reasonability, the more likely it is that you will need more money than you’ve paid yourself. Both situations can lead to quickly diminishing savings.
2. You Are Adding Debt
What To Do – Look For Spending Patterns
Your debt should not grow in retirement. Ideally, getting entirely out of debt will be the first step of any retirement plan. You want to have the mortgage, car, credit cards and (these days) student loans paid off before it’s time to stop work, if possible. Either way, aside from the occasional mortgage if you move into a new home, you don’t want to start adding new debt.
So it’s a huge red flag if your debts start rising in retirement. That rule goes double for credit card debt. If you begin to rely on loans and credit, it’s a sign that you need more money than you have and that debt service will only grow as you age.
There are two best steps here. First, keep an eye out for this early. Don’t miss the warning signs if your credit card bill goes up from one month to the next, because small upticks can grow quickly. Second, if your debt does begin to grow, look for your line items. Figure out what you are spending this money on and how you can change your spending to reduce those areas.
This is an early-detection issue. If you begin debt-spending in retirement, you need to figure it out early and shut it down fast.
3. Your Lifestyle Expands
What To Do – Revisit Your Monthly Budget
This is another perspective of intuitive spending. For some retirees, their first sign of a problem comes with a declining bank account. For others, it shows up in the things they’re buying. Are you going out to eat more often? Taking nicer vacations? Wearing better clothes? Have you recently bought a boat? This is known as lifestyle creep and it’s probably the most classic signal of trouble ahead.
Now, it’s important to understand that this isn’t always a bad thing. You might have decided to spend your retirement enjoying things you never had time or patience for during your working life. That’s excellent. Delayed gratification is sound financial planning. Just make sure that this is a plan rather than a combination of intuitive spending and (often enough) boredom.
As always with intuitive spending issues, the best step is to make a budget. Come up with clear numbers around what you can afford to pay yourself and what you can afford to spend. After all, if you never take this money out of bonds then you can’t spend it.
4. Taxes And Fees Take You By Surprise
What To Do – See A Financial Planner Immediately
This might be one of the single most common financial problems for retirees. Certainly, it’s one that almost all financial advisors reference when it comes to retirement surprises. You get to retirement, you start collecting your drawdowns and Social Security benefits and the numbers are smaller than you expected. Maybe much smaller.
You forgot to plan for the taxes. The good news about this warning sign is that it will almost certainly show up early. If you forgot to include taxes and broker fees in your plan, you should notice it right away. The bad news is that this can lead to a very substantial gap between your expected income and your actual numbers.
If this happens, the best thing to do is seek professional advice immediately. Your savings are worth significantly less than you thought they were, both in terms of income and long-term growth. You need to know the real numbers and only an accountant or advisor can reliably help you with this. Then you can make a plan for how to manage taxes over the long run.
5. You Have No Investments
What To Do – Reinvest Your Money
Almost all retirement plans suggest moving your money to safer, low-risk assets when you enter retirement. This advice ranges from S&P 500 index funds at the very riskiest end of the spectrum to the mainstream advice of shifting mostly into bonds and annuities. The rule of thumb is often to shift your assets to an 80/20 mix between safe investments, like bonds and growth investments, like an equity index fund.
What they do not recommend is that you take your money out of the market entirely. This is because generating little or no return in your portfolio can easily lead to an empty retirement account. If you are holding mostly low-return products like depository accounts or Treasury bonds, notice that account balance early and act on it.
There are many reasons for this. One is the eroding effect of inflation. A good rule of thumb is that, at the Federal Reserve’s 2% benchmark rate, inflation will cause prices to double every 35 years or so. This means that even during ordinary times inflation will cause your portfolio to lose significant value unless it can generate offsetting growth.
Beyond that, there’s the simple fact of duration. In an era of steadily increasing health and longevity, you should plan to be retired for 30 years or more. This will cost a lot of money and it’s an opportunity for a lot of growth. For many people, capturing that growth is essential to making their retirement work.
Bottom Line
Running out of money is a danger that every retiree needs to plan for. Fortunately, as long as you have a good plan and keep an eye on your finances, you can prevent this from happening. For every concern or risk, there are things you can do to put yourself in a better position overall. The last thing you want is to run out of money in retirement. If you’re not sure your own plan will do the trick, you may want to work with a professional.
Retirement Planning Tips
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A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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The best way to handle a problem is to prepare for it. With this simple checklist, you can plan for your retirement, prepare for it and know if you’re ready well in advance.
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The post Five Signs You Might Run Out of Money in Retirement and How to Prevent It appeared first on SmartReads by SmartAsset.
Most married couples have the benefit of not one, but two Social Security checks in retirement. Even if only one spouse worked, the other can claim a spousal benefit that could be worth hundreds to thousands of dollars. The average monthly spousal benefit as of December 2022 was about $889, which would be worth nearly $1,000 per month in 2024.
But your choices play a big role in how much you take home from the program. Below, we’ll talk about how your partner’s benefit and your claiming age determine the size of your checks.
Image source: Getty Images.
The worker’s retirement benefit forms the foundation
A spousal Social Security benefit is based on the worker’s primary insurance amount (PIA). That’s the benefit they qualify for at their full retirement age (FRA), which depends on their birth year. The table below can help you find yours:
|
Birth Year |
Full Retirement Age (FRA) |
|---|---|
|
1943 to 1954 |
66 |
|
1955 |
66 and 2 months |
|
1956 |
66 and 4 months |
|
1957 |
66 and 6 months |
|
1958 |
66 and 8 months |
|
1959 |
66 and 10 months |
|
1960 and later |
67 |
Source: Social Security Administration.
To calculate PIA, the government plugs the worker’s average monthly earnings over their 35 highest-earning years, adjusted for inflation, into the Social Security benefit formula. The result is their PIA, but that’s not always the same as their take-home benefit.
The Social Security Administration runs an additional calculation to adjust benefits up or down for those who don’t claim right at their FRA. Claiming early shrinks checks by 5/9 of 1% per month for up to 36 months of early claiming. Those who sign up more than 36 months early lose an additional 5/12 of 1% per month. This means your checks will be 25% to 30% smaller if you claim at 62.
Delaying benefits, on the other hand, increases a worker’s benefit by 2/3 of 1% per month up until they reach 70. That results in a maximum benefit of 124% to 132% of their PIA.
How to calculate your spousal Social Security benefit
A Social Security spousal benefit is worth up to half of the worker’s PIA, but there’s a similar penalty for early claiming. If you sign up before your FRA, you’ll lose 25/36 of 1% per month for your first 36 months of early claiming and 5/12 of 1% per month for every month of early claiming beyond that. Unfortunately, there’s no benefit to delaying spousal Social Security beyond your FRA.
You can estimate the size of your spousal Social Security benefit by having your spouse create a my Social Security account. They’ll need to answer some identity verification questions to set it up. Then, they can access several valuable resources, including a calculator that estimates their Social Security benefit at every claiming age.
This calculator makes some assumptions about how long your partner will work and what their income will be during this time. But you can adjust these up or down as necessary. When you feel you’ve accurately estimated their future earnings, look at the benefit amount at their FRA.
On the same page, you should see a tool where you can check the amount of your spousal benefit. Enter your date of birth and desired claiming age to see what you could get.
Maximizing your household Social Security benefits
Coordinating your Social Security strategy is key to maximizing your household benefits. You cannot claim a spousal benefit until your partner signs up for the program. But if you qualify for a retirement benefit in your own right, you may claim this whenever you’re ready.
Timing your claim is crucial if you hope to get the largest lifetime benefit. For many people, delaying benefits is best if it’s feasible. But those with shorter life expectancies and those struggling with their bills might prefer to sign up earlier. Explore a few options to find out what’s best for you.
Sit down with your spouse and select a tentative Social Security claiming age for both of you. Once you know this, you can figure out how much of your retirement income needs your checks will meet and how much you must save on your own.