How to avoid a retirement crisis

Posted on September 7, 2012 at 3:54 pm

(MSN Money) Perhaps you have saved little or neglected your 401k. A comfortable retirement might still be within reach. Here’s what to do.

Some Americans may be better prepared for retirement than they realize.

About 56% of baby boomers and Generation X (people now between about ages 38 and 65) are saving enough to cover their basic retirement costs, including uninsured medical expenses, according to a recent projection by the Employee Benefit Research Institute, a Washington-based nonprofit think tank.

The bad news is that 44% aren’t saving enough, and some of those people are on the lowest rungs of the income ladder, so they may have little opportunity to ramp up their savings as they age.

Still, while some people face a troubling retirement outlook, others in that 44% group can take steps to get their savings on track.

“Some Americans face a retirement crisis, but it isn’t the majority,” said Stephen Utkus, the director of Vanguard Group’s Center for Retirement Research.

“For the longest time, studies have always pointed out that about 50% of Americans seem clearly ready for retirement,” he says. But it’s a mistake to assume the other half is in deep trouble.

Instead, Utkus says, people fall along a spectrum of retirement readiness, with 20% to 30% of Americans “partially ready” for retirement.

“A significant number of people can take some steps between now and retirement to move the dial and get to ‘prepared,’” he says.

Here are four ideas that can help you get ready for retirement:

1. Increase your savings rate 1% or 2% each year

You’re tired of being admonished to save more, but why not do it relatively painlessly with a small annual increase?

Ramping up your current 5% 401k contribution rate to 10% over a four-year period means an extra $550 in monthly income in retirement, according to an analysis by Fidelity Investments. The analysis assumes a 37-year-old worker with a $74,000 annual salary, a $20,000 401k account balance, a 3% employer match, an 8.35% annual return and an age-67 retirement date.

Then consider going beyond 10%. “If somebody is going to be saving their entire career, 15% is typically what most financial professionals suggest you put in,” says Jack VanDerhei, a research director at the EBRI.

2. Work 2 extra years

Maybe you’re not keen on the new normal for retirement, which for some means not retiring at all. But there is a middle road: Work just two more years than planned.

Consider two hypothetical people, each with $1 million in savings. One retires at age 64, the other at 62. They both seek $75,000 a year in retirement.

For the early retiree, the combination of a lower Social Security payout (about $1,500 monthly, versus $1,750 monthly), two fewer years of earnings on his savings, and the portfolio hit from pulling out $150,000 for living expenses in those two years will mean running out of money by age 88.

Solely by virtue of waiting two years, the other retiree will have $242,358 in savings at age 90, according to an analysis by Richard Jackson, a chartered retirement planning counselor and a principal at Dallas-based Schlindwein Associates. The analysis assumes a 6% rate of return and doesn’t take into account taxes, variability of returns or additional savings from delaying retirement for two years. The Social Security payout estimates are based on his clients’ experiences. CONTINUE READING

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